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Is kleptocracy a relevant term for discussion about the origins of the crisis?

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By Edward Harrison of Credit Writedowns

Yesterday, I indicated I would write a few thematic posts as a look back at some of the more important economic topics that this credit crisis has uncovered. Tying posts together in a theme definitely gives a better holistic view of a the themes than the posts do in isolation. But I also enjoy writing this because the review process gives me a better perspective of where we have come from and helps judge where we are headed.

Yesterday, I wrote about economic stimulus. My conclusion was that while stimulus may have helped avert crisis, the process made clear that crony capitalism is alive and well. So, the second topic I wanted to address today was crony capitalism. However, in writing this post, the lead in describing kleptocracy became so long that I decided to cut this into two bits; this first one is on kleptocracy and a later one will be on crony capitalism.

The first post I wrote related to kleptocracy was in March of 2008 called “A populist interpretation of the latest Boom-Bust cycle.” At the time, I wasn’t really blogging very seriously. I had just started two weeks earlier and wanted to flesh out some ideas that I had long considered germane to the understanding of the credit crisis. But, in retrospect, the thesis I developed in this post has become central to my thinking about how the American and global economy have evolved in the fiat currency era.

Kleptocracy defined as the status quo

The thesis was this:

[Jared] Diamond postulates that more stratified societies are by definition less egalitarian, but more efficient and are, thus, able to eradicate or conquer more egalitarian, less stratified societies. Thus, all ‘advanced’ societies with high levels of GDP are complex and hierarchical.

The problem is: these more stratified, more complex societies are in essence Kleptocracies, where those in power re-distribute societal wealth to themselves. Those at the bottom of the society’s pyramid accept this unequal, non-egalitarian state of affairs because they too benefit from their society’s relative advancement. It’s a case of a rising tide lifting all boats.

In short, the playing field in all modern day nation states is by definition unequal. The question is whether this should be tolerated, mitigated or eliminated. An unwritten assumption I made when I wrote the post is that humans are genetically programmed for fairness. My understanding is that scientific studies have convincingly demonstrated that human beings will actually consciously disadvantage themselves to seek revenge as a means of restoring justice and fairness.

This would suggest that a major flaw in neoclassical economic models, especially as regards a self-equilibrating economy, is the focus on rational expectations and efficiency at the expense or fairness and/or irrationality. A neoclassical economist might tell you that a rising tide lifts all boats and it is rational self-protection for economic agents (aka real human beings) to accept inequality for this very reason. But, in the real world, fairness and justice are important as well. And when an economic system is deemed unfair, people will go so far as to hurt themselves economically in order to level the playing field.

Stability of status quo leads to overreach and instability

So, my thinking is this: because of the natural state of inequality endogenous to any stratified society, over time the natural tendency of any ruling elite is to deploy the state’s coercive power for greater and greater self-benefit. I liken this to Hyman Minsky’s instability of economic stability theorem. The stability of power leads to overreach and overthrow. This is a view largely consistent with Paul Kennedy’s themes of imperial overstretch in his book The Rise and Fall of the Great Powers.

In the post I expressed these sentiments saying:

Diamond says the Kleptocrats maintain power using 4 different methods:

“1. Disarm the populace, and arm the elite.”

“2. Make the masses happy by redistributing much of the tribute received, in popular ways.”

“3. Use the monopoly of force to promote happiness, by maintaining public order and curbing violence. This is potentially a big and underappreciated advantage of centralized societies over noncentralized ones.”

“4. The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy.”

Kleptocracy in America?

The obvious corollary of this theory is that most successful modern societies are, in fact, kleptocracies. The key is to use the four methods to gain popular support in order to re-distribute as much wealth to the ruling class as the populace will support. If the ruling class takes too much, it will be overthrown and replaced by a new ruling class (which in turn will re-distribute wealth to itself using the same four methods).

How the status quo maintains the status quo

Let me take these points one by one. I will preface this by saying that, as the stability of the economic status quo disintegrates into instability via economic depression, you should expect the ruling elite to step up uses of these methods of retaining power.  So when I wrote in my Depression piece about “more muscular forms of government,” this is part of what I was referring to.

As Libertarians see it, the right to bear arms is an essential in stopping the elite from maintaining power unjustifiably. Obviously, which arms, when they can be borne and how is a constitutional issue that goes to the heart of American democracy.

The second issue is about “bread and circuses” or what I call the anesthetizing of the populace as ironically demonstrated in this Star Trek “Bread and Circuses” from TV, our own modern-day agent of mental anesthesia.

The third issue is about totalitarianism.  Civil libertarians like myself see the permanent war state as promulgated by the Bush administration post 9/11 – and now maintained by the Obama Administration – as a clear sign that the state’s use of the monopoly of force to promote order is rising and will continue to do so. Eisenhower’s military industrial state warnings were warranted. You can see some of the articles on that very topic here in my bookmarks. And you should note Obama’s poor record on civil liberties.

The last (and perhaps most important) issue, in my view, has to do with the unabiding faith in free markets that many now have. It is with religious zeal that these so-called Libertarians defend the primacy of markets over all else when in reality common sense would tell you that those with the greatest influence and money will always be at an advantage without some check on that influence and power.

How ideology is central to retaining the status quo ante

I think this last point is important. Think of how Diamond phrased this:

The remaining way for kleptocrats to gain public support is to construct an ideology or religion justifying kleptocracy.

The important thing to realize here is that ideology is a tool used to control the masses while those in power re-distribute to themselves. Diamond was probably talking here about ancient societies: the Mayans, Incas, the Greeks, the Romans, Easter Island. But, it does apply quite well to the modern-day. After all, in the U.S. average hourly earnings peaked more than 35 years ago. And we can see that most of the economic gains of the last two decades has been an illusion masked by gobs of debt.

But freshwater economists have this view that the economy is always self-equilibrating and this means government must be held at bay any- and everywhere lest it reduce the efficiency of the free market. This is an extreme ideological position which gained sway in the aftermath of the disaster of the 1970s. Fed Chairman Alan Greenspan was an adherent of this ideology despite holding a central planning position as Federal Reserve Chairman which was antithetical to the views he espoused.

Markets are wonderful. A largely market-based economy is certainly more ‘efficient’ than a non-market based one (ask the Soviets). But, markets are not self-regulating. They fail – and catastrophically so. But no manner of real world experience seems to shake ideologues’ free-market zeal. To give you an example of the mindset, Alan Greenspan is reported to have thought that markets could even self-regulate fraud – no regulatory oversight necessary. 

See the video in Frontline – The Warning: Who Knew About the Looming Financial Crisis for this particular revelation and Ms. Watkins, why does Charlie have lit dynamite? for why this is absurd. Even when you think Greenspan has learned something, he proves time and again that he just doesn’t get it. And don’t think he is alone in officialdom. Former Fed official Frederic Mishkin has shown he doesn’t get it either.

Not only is the freshwater view of rational economic agents and efficiency completely ignorant of the role of fairness, it also disregards the very real tendency for power to consolidate over time and to lead to crony capitalism. This is what I refer to as “deregulation as crony capitalism.” I see it as central to the causes of the crisis.

I will pick up on this theme in a later post. Next up on my year in review is a post on crony capitalism in action and how the credit crisis solutions reveal that the ruling elite want to return to the status quo ante. Overreach has been the order of the day and will ultimately invite an opposing response.

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75 comments

  1. Jim

    Confronting the Kleptocracy–A View from Below–On the First steps toward a Social Movement:

    1. Clarity of purpose is needed for ordinary people, remote from power, to rise collectively and democratically.

    2. A collective, democratic insurgency will not occur merely because “times our rough and getting rougher,” or because people get “angry” or because average citizens are exposed to brilliant blog analysis which exposes the kleptocratic nature of the regime.

    3. After the dymystification of the social system and before democratic insurgency can come into play the fear of the structure of power and the deferance towards that same power structure must be confronted on an individual basis.

    4. Nothing enduringly democratic is ever spontaneous because democracy is largely a conversation and democratic forms (such as blogs) must be created to insure such a conversation.

    5. Deference towards established power is deeply internalized in our beings but when deference is replaced with collective counterassertion power begins to be fundamentally challenged.

    1. kevinearick

      I think you are quite correct Jim.

      Unfortunately, several thousand years of increasing complexity is difficult to unwind in the space of a business card, and the population has been systematically denied an education. Only instinct preserves the individual commoner, but evolution always provides a path.

      Question: What to do about it for the complex organization?

      Discussion:

      There are two general avenues to solution, the hard way, which fights the laws of physics, and the “easy” way, which employs the laws of physics. Performance is measured by the amount of effort that ends up in a useful product.

      Most individuals are doing it the hard way. Fighting an empire strengthens it, because no work ends up in a useful product, and the kleptocracy multiplies reaction to individual resistance, by applying the lesson learned to the masses. The individual, or group of individuals, becomes the foot upon which the lever is applied.

      The easy solution is for the individual to become self-governing and associate, share resources, with others that are self-governing, to fully distribute government.

      Capital is doing it the hard way by attempting to identify and isolate individuals with multiplier effects, for its own immediate consumption. By limiting internal migration, shutting down borders to emigration, and penalizing noncompliant multiplier effects with termination, capital is shutting down its own economy, because effective cross-pollination is mandatory, and because consultants profiting from the work of others drives multipliers to develop alternative systems.

      The “easy” way is for capital to create a stable magnetic character to draw multiplier effects into orbit, with as much current as necessary. Evolution ensures that multiplier effects have their choice of capital to build on, by recycling non-performing capital.

      Planetary evolution efficiently weeds out maladaptive behavior, by temporarily feeding it, inbreeding the cancer until the last fool enters, and then terminates the subsidy. Competing with it is counter-productive. It’s not necessary to beat city hall; stand out of the way and it will implode of its own gravity.

      Humanity’s job is to balance the growth of planetary evolution. The planet bred dinosaurs for that job, and terminated them as a sunk cost. Humanity has been fueled by their remains. Now, humanity’s demographic curve has turned toward equilibrium, and humanity is decreasing diversity.

      Expect the first ghost …

      Labor did not miss the turn in demographics. Capital lost sight of labor when it created artificial labor through government fiat, to reinforce self-replication. Every individual has a component of each characteristic, but the inability to insulate each results in self-discharge, the “feeling” of ineffectiveness in the discharged characteristics.

      All environments are symbiotic. The first step to resolution is recognizing system character upon entry and providing an adjustable complimentary response to improve system balance. The second step is to measure return, and make migration decisions accordingly. Never waste resources on sunk costs.

      The demands of evolution on labor are much more brutal than those from capital, a lesson capital never learned, in several thousand years, because it always had the crutch of demographic acceleration. Now, evolution is removing that crutch, disabling capital.

      The only way for capital to cross the footbridge left by labor is to excise family law through purely municipal interest law. Otherwise, much of capital will become a sunk cost. Self-sufficient communities producing a surplus must be first in the queue, scaling up the bridge as they pass.

      Labor is not going to carry anyone over the bridge, because there is no point in bringing over free riders; they will not survive.

      Conclusion:

      Left to its own devices, capital will breed weaker counter-parties, cutting off its own circulation, relative to evolution, forcing it to consume everything in its remaining environment. Labor starts developing the next economy as soon as capital breaks the agreement, and as capital begins to starve, it employs government to hunt down labor. Nothing new here, except the change in demographic phase.

      Capital is now stranded, dividing and conquering itself to death, while evolution collects the free riders, clutching non-performing assets, into a group for efficient recycling. The point of developing the Internet was to make the process transparent.

      ***

      Subject: Self-Fulfilling Promissory Notes Under Conditions of Infinite Monetary Expansion

      Problem:

      Family Law may deliver desirable byproducts, which may not otherwise be obtained, but it effectively translates the AC economy, savings and investment / debt and consumption, into a DC economy, doubling down on debt and consumption, carving out production capacity, and leaving behind a service sector economy, addicted to debt, and unable to provide for its population’s future.

      Symptoms:

      2% GDP after $trillions in monetary expansion, with more to follow; After the healthcare capital bailout, which will consume 20% of the shrinking economy to subsidize maladaptive behavior, Congress wants to follow up with an energy capital bailout, which will send another round of capital to emerging markets, and undercut domestic wages again. Borrow and spend, hollow out the real economy and replace it with an artificial economy, and create problems with never-ending monetary solutions – this is different how?

      Welcome to evolution 101 – perennial per capita tax receipt declines, and increased social demand, with the momentum of the global economy, addicted to American artificial demand, coming at America, which is already stationed at the edge of the cliff, municipalities first, states next, and then the feds. Learn or fall into the chasm.

      Unfunded liabilities are still accelerating among nation/state containment systems, amidst decelerating demographic curves, with monetary expansion as a promise to bridge the rapidly growing gap, sometime in the future – all the nation/state governments are on the wrong side of the breach, holding their own populations hostage to hidden debt, and threatening each other with mutually assured destruction.

      That doesn’t get the bridge built, and the cost of the bridge is going up with opportunity costs, exponentially.

      Total declared domestic debt roughly 500% GDP, global unfunded liabilities roughly $500 Trillion.

      Summary:

      For the individual: follow your instincts.

      For the organization: only attempt to solve that part of the problem for which you are suited, and add talent with experience, as the edge of re-coherence becomes increasingly transparent. Get rid of the business-speak. There are no simple solutions. Every organization will have to develop their own tools, to meet their own unique component of the demand. The cookie-cutter days are over.

  2. Tim Tempest

    Karl Polanyi’s “Great Transformation”, published in 1944 (same year as Hayek’s “Road to Serfdom” – both books really defining the economic polarisations that came to be in the western world) is the best work on +markets+ and what they actually were pre-industrially I’ve ever read. It dismantles the myth that Smith’s “trucking and bartering” were central to mankind’s interactions, trade having always been constrained by social relations and the need to maintain the social fabric.

    It is also predictive in terms of how permitting the market mechanism to become unfettered (to the degree it can be implemented – he says that full implementation is impossible since all elements of society which are negatively affected by it set out to curb it) would cause catastrophe and would lead to the destruction of civil society and, remarkably for 1944, the environment.

    Really worth a read for anyone who wants to get into political economy and not just modern neo-classical economics.

  3. Yossarian

    So private actors use their wealth and power to corrupt the regulatory process and shield their enterprises from competitive forces and your answer is: more power for the same inherently corruptible and non-incentivized government and regulatory bodies?

    People aren’t perfect but we can try to be more perfect. We can bias our economic system heavily towards the free enterprise competitive model while diligently seeking out and destroying corruptive influences. In the end it is the responsibility of the populace to ensure fairness and strong reciprocity when it comes to dealing with market corrupters.

    1. Edward Harrison Post author

      Yossarian,

      I think you are misreading something in your first paragraph. Your second paragraph goes more to the point. It’s spot on in my opinion. I would have said “markets” aren’t perfect but we can try to be more perfect instead of “people.”

      What I am saying in effect is I recognize their are some flaws in a free-market capitalist system but it is infinitely better than the alternatives. I would definitely want a heavy bias toward free enterprise, the key word being bias.

      The pendulum has swung too far to the point where you have people like Greenspan – who think markets can self-regulate fraud – are in charge. Regulators are there to enforce rules and codes of behavior just as a referee does. Without rules, you have anarchy.

      I think Minsky’s central point about stability leading to instability suggests there really are long wave economic cycles predicated on these kinds of pendulum swings.

      In my opinion, we are just leaving an era where the pendulum swung in one direction toward a sort of implicit crony capitalism. The referees were favoring the big money team (Man U, Barca, LA Lakers, etc). Now the pendulum is swinging in the other direction. Eventually, it will go too far here as well. Eventually, the referees are going to be the ones deciding the game to all the players’ detriment. But that is not a concern right now.

      1. Yossarian

        My criticism of your view lies in what I believe to be your misrepresentation of the Libertarian, free market view. You take an example of those who mistakenly apply a free-mkt ideology to a market that is neither free nor competitive and use it to proclaim that the real (properly understood) free market principles are flawed.

        The best example is Greenspan- I am not a fan but his book is a worthy read. In it he says how he came to accept that Fabian Socialism was a political force that is not ready to be stopped so he abandoned his conservative gold standard leanings in favor of an inflationary financial system necessary for administering the stealth tax needed to finance the welfare state. Thus, he mistakenly thought free markets would work even though an inherently unfree body (The Fed) was influencing them via such moral hazard inducing inflationary policy. Furthermore, he erred in assuming that, for instance, the self-interest of the bankers was in any way related to the self-interest of their shareholders. Banks could not be counted on to self-regulate because there was a “heads I win, tails you lose” incentive structure.

        The free market ideology is nearly ALWAYS right but it is also misunderstood and misapplied. Other examples of the misapplication include failure to account for externalities (pollution, for instance), failure to understand natural monopolies, and failure to account for a warped incentive structure whereby true owners are disconnected from their self-interest (e.g., pension funds managing savings).

        1. pebird

          “The free market ideology is nearly ALWAYS right …”

          It may be nearly always right, but it is never articulated in a coherent manner.

          How does free market ideology fundamentally reconcile itself with the need for law to enforce property relationships?

          The “free” market is established only concurrent with state power.

          Why does the free market require an external force for enforcement? And if so, why are we surprised when state force has to increase in size as private interests grow?

          There is no “free market” except as an ideology – it may be useful at times, but it only exists as an intellectual framework.

          The free market ideology is an excuse private actors use to avoid responsibility to the public.

          Of course competition is good, individual responsibility is good, but there is little more ironic than seeing players whose success is due primarily to state action whining about the destruction of free markets when their interests are threatened.

          In one sense, the ideology of free markets has been correct – successful interests can freely coordinate their actions, freely choose which laws to follow, freely purchase political favors, and freely take from those less powerful.

          Free market ideology is simply a way to justify power – that’s why is called an ideology. It’s a wonder that personal liberty and individual freedom ever entered our vocabulary, must have been a typo.

      2. psychohistorian

        Edward,

        I disagree with your contention that the pendulum is swinging the other way. The crooks have just stumbled along the way of their looting. When those folks are in jail I will agree that the pendulum is swinging the other way.

        Not before.

      1. Yossarian

        Define “religion of the free market.” In no way should that include regulatory capture to obstruct competition, subsidies, corruption, moral hazard, violations of property rights, etc.

        Free markets revolve around competition, the rule of law, respect for private property, etc. What is it that you disagree with?

        1. bob

          Point to one example of a free market, anywhere. Already all of your examples are filled with proclamations of what is not a free market.

          1. bob

            You offer up the free market as a cure all. You can’t point to any example of it working. Ever. You then use these examples of it not working, to ‘prove’ that it could.

            In place of evidence you offer theory and judgement.

            This is called religion.

          2. JC

            Ebay?

            As both a buyer and seller for many years on Ebay I can say for a fact that there is little that is “free market” on Ebay today compared to when they first came onto the scene.

            They regularly interject themselves into the transactions nowadays as far as even going against their own stated policies instead of just acting as a dis-interested auctioneer.

            I believe that Mr. Harrison has it right, and that over time those that control the market change the rules and bias favor towards their profits over bias towards maintaining the market itself.

  4. Advocatus Diaboli

    The problem with kleptocracies and empires is that they try to operate beyond the “safe level” and do not turn back even if the “gauges are indicating danger”. Such danger signals make them even more resolute, and it is the following sequence of actions that ruins them.

    1. Edward Harrison Post author

      That is a good point. The collapse of Spain’s empire is a good lesson there. It is somewhat ironic that the gold they found and stole in the new world and the inflation it caused was a principle economic reason that they became overstretched.

      I see these things a bit fatalistically. The gauges indicate danger but power is a powerful elixir that few relinquish willingly.

      1. MarcoPolo

        Completely disagree with what I perceive as your take on Spanish history which I feel is off the mark and and would offer that the economic problems followed the political problems of Hapsburg intrigue. Just sayin

        1. spectator

          No surprise that not many know new found gold and silver and inflation in Spain caused its decline. Unfortunately, few economists even understand how damaging these effects are. Here’s a snippet from Wikipedia

          “During the sixteenth century, Spain held the equivalent of US$1.5 trillion (1990 terms) in gold and silver received from New Spain. Ultimately, however, these imports diverted investment away from other forms of industry and contributed to inflation in Spain in the last decades of the 16th century. “I learnt a proverb here,” said a French traveler in 1603: “Everything is dear in Spain except silver”.[14] This situation was aggravated (though not as much as popular myth asserts) by the loss of much the commercial and artisan classes with the expulsions of the Jews and Moriscos. The vast imports of silver ultimately made Spain overly dependent on foreign sources of raw materials and manufactured goods.”

          1. Blissex

            «The vast imports of silver ultimately made Spain overly dependent on foreign sources of raw materials and manufactured goods.”»

            Nowadays that is called “the dutch disease”. Very, very disciplined nations (hopefully Norway will be one) may escape the worst effects of a period of very high windfalls from capital liquidation, even if it engenders a very powerful addiction.

            A fictional example comes to mind in the extraordinarily wise “Norstrilia” sci-fi novels by Cordwainer Smith.

    2. JasonRines

      Absolutely correct. The real problem is that such will take a couple of billion people with them on the way out.

      Your point applied to criminals means they don’t stop because they don’t believe they can be stopped. When one applied such thinking as a forecast in global affairs, it says to me only a world war will actually stop this existing global crime syndicate.

      As most people on earth are now chained to debt slavery for life and either already are paupers or heading that direction, the crime syndicate will soon turn on each other, Mexican stand-off. When a nation or society moves away from these three concept of truth, freedom and justice(per Edward’s pendulum analogy) the people begin with attempting to get at the truth, then comes the struggle for freedom which always becomes physical and finally, comes justice to the perpotrators.

      Since TPTB are most aware of history as I have mentioned it, that is the reason why we hear that the world’s population as posited by the elite should be 120,000 total.

      Instead of merely charting where we are in this evolutionary process to restore balance, we should be continuously discussing and planning what kind of world we wish to live in after the calamity stage is over.

  5. attempter

    Another way of putting this is that, contrary to the Big Lie of market fundamentalist ideology, men are not by nature “capitalists” who love to compete.

    They are by nature feudalists, gangsters, who won’t keep on “competing” for one day longer than they have to.

    The day they have enough muscle and wealth to suppress the competition and live by extracting rents they’ll do so. That’s what we see in pretty much every sector in America by now.

    What’s the sector which isn’t mature by now? Where should there, according to capitalist theory, be anything more than minimal profits by now?

    Yet everywhere we still see the bloated profits of a gold rush. That tells us this is a medieval economy.

    The clear policy solution to this, if we really wanted “capitalism”, would be to have relatively free markets among small businesses but impose absolute limits on size.

    Not to wait for actual anti-competitive behavior, which we would know for a fact is coming, but to pre-emptively strike at size itself. (The ancient Greeks display their wisdom with the related practice of ostracism.)

    But few would want to do this because we don’t have many capitalists (or socialists for that matter), but mostly feudalists, even among the non-rich. That’s how far the religious brainwashing has gone.

    Related to this, one point I’d add to the innate propensity to enforce fairness (which only tends to manifest on the part of the disadvantaged, since if you’re among the feudalists you find the casuistry to see the distribution as “fair”) is that it’s also rational.

    We know that concentrated power and wealth is never neutral, never keeps to itself, but is always used as a weapon against the less wealthy and powerful.

    If a poor man lives next door to a rich man, it’s not just the existential “unfairness” of the situation; it’s the fact that the rich man will, figuratively and/or literally, dump his garbage on the poor man’s lawn and then start stealing from him outright.

    1. Yossarian

      So this is not a debate on the optimal economic system but on the nature and ethics of man. For feudal man will impose his will on weaker men in any system: capitalist, socialist, communist, fascist. No regulatory body or enlightened plan of government will prevent that if that is the social norm. Do you think Soviet Russia was egalitarian? Do you think China was/is? How about Venezuela?

      1. paper mac

        This is only an insightful comment if you believe the last couple thousand years of recorded history are the sum total of human experience. Pre-agrarian societies (which existed for tens of thousands of years) were almost by definition egalitarian and consensus-based. The few remaining examples of hunter-gatherer societies show all the hallmarks of egalitarian societies.

        Agrarian societies, and the much larger populations and higher population densities that come with them, required organized, top-down hierarchical management to be efficient, especially in arenas like warfighting and public policy where it was not possible to gather together thousands of people and form a consensus. Agrarian societies, although they could support much higher populations, were much less egalitarian, less healthy, and less free than hunter-gatherer societies or pastoral societies. Despite these failings, agrarian civilisation (despite a few close calls with pastoralists like the Mongols) proved to be efficient and durable.

        We now have the public education system, communications technology, and political and economic philosophy necessary to return to a more egalitarian state. The agrarian/hierarchical/kleptocratic model is obsolete and wildly dysfunctional in this modern age. The natural state of humanity is an egalitarian one. It is no coincidence that a preference for fairness is deeply, genetically engrained in us- top-heavy kleptocracies are an evolutionarily recent invention (a mere 8-10k years of our young species’ 200k year history).

      2. DownSouth

        Yossarian,

        You say: “So this is not a debate on the optimal economic system but on the nature and ethics of man.”

        That for me just about says everything, and tells us where you are coming from.

        In Moral Sentiments and Material Interests Herbert Gintis et al write:

        But Smith’s legacy also led in another direction, through David Ricardo, Francis Edgeworth, and Leon Walras, to contemporary neoclassical economics, that recognizes only self-interested behavior.

        So the neoclassical economists and their fellow travelers–the New Atheists like Ayn Rand and Richard Dawkins who also enlist biology to their cause–create this non-existent caricature of man. In their make-believe universe, they seize upon The Wealth of Nations, and the human traits Smith explored in The Theory of Moral Sentiments are deemed to not exist.

        Their reading of Nietzsche is equally as selective and perverse. As George A. Morgan wrote in What Nietzsche Means, the “aggressive aspect of the will to power is often emphasized by Nietzsche and has generally been mistaken for the whole.”

        Neoclassical economists and New Atheists thus, by definition, become nihilists, as defined here by Nietzsche:

        A nihilist is a man who judges, of the world as it is, that it ought not to be, and of the world as it ought to be, that it does not exist. Accordingly, existing (acting, suffering, willing, feeling) has no sense: the passion of “in vain” is the nihilist’s passion…

        Of course the nihilism advocated by neoclassical economists is far from the world envisioned by Nietzsche, despite the New Atheists’ claims to the opposite, as Nietzsche here makes quite clear:

        I see something also above me, greater and more human than I myself am; help me, everybody, to attain it, as I will help everyone who knows and suffers from the same thing; in order that at last the man should again arise who feels himself abundant and unlimited in knowing and loving, in vision and ability to achieve, and hangs upon and in nature with all his entireness as judge and standard of the value of things.

        Or as Morgan goes on to explain about Nietzsche’s philosophy:

        The old ideas are wrecked–must they be the only ones possible? he came to ask. The world is not worth what we thought–is it therefore worthless? Is it not hasty to conclude that, because the old meaning is false, no new one can be discovered? Is it not absurd for man to condemn all existence because it does not conform to his arbitrary specifications? Perhaps nihilism indicates something wrong with us rather than with nature. Perhaps it is the modern world, not the world, that is worthless.

        1. attempter

          The basic lie of the fascist/Randian hijacking of Nietzsche runs as follows.

          N described the will to power as man’s motive force, which can be manifested through a vast spectrum of ways, from the lowest materialism, greed, violence, and power-lust, up through to the creations of the intellect and creative spirit: art, philosophy, spirituality.

          N did not laud the former, considering materialism and temporal power-seeking to be merely animalistic, subhuman. Where he talks about these he’s simply describing the world as it all-too-often is.

          He exalted what he called the sublimation of the will to power: its intellectual, spiritual, and artistic manifestations. This is what the Ubermensch is all about.

          So when gutter thugs use N to justify their own gutter greed and violence, they’re radically falsifying and slandering him, embodying everything he despised and yet fraudulently claiming his imprimatur.

          Unfortunately, this lie has largely succeeded in the popular mind and the MSM, and even among supposedly educated people.

          1. DownSouth

            It’s a shame how the New Atheists desecrated Nietzsche’s writings in order to serve their own propaganda needs. I say that because, of all the philosophers of the 19th century, he alone seemed to come closest to what we are now finding to be the reality of human nature.

            First, as Morgan points out, he broke with “with the older psychology” that posited the rational human agent that informed classical economic theory: ” ‘passion’ is always and necessarily the mover in human nature; reason is not an independent controlling power but the instrument of passion.”

            Then he broke with the neoclassical conviction that all human behavior is self-regarding, relegating this urge to the “degenerate,” the “cowardly,” the “weak” and the “sick.”

            Nietzsche formulated his philosophies during a cycle of decadence similar to our own where greed and selfishness were revered, and Nietzsche left little doubt how he would evaluate our current crop of “Masters of the Universe”:

            Species do not grow in perfection: the weak always master the strong again–that is becasue they are the large number, also they are more clever…the weak have more ingenuity… By ingenuity I understand…wariness, patience, cunning, disguise…

            Then, as Morgan goes on to explain, Nietzsche endeavored “to substitute process for substance and complexity for simplicity.” “The first step toward realism…is to eliminate hallowed superstition. So he demands that man be ‘translated back into nature.’ ” He “bitterly regrets the lack, in his contemporaries, of their subtlety and psychological perceptiveness.”

      3. attempter

        I probably wasn’t clear on what I meant. By man’s nature I mean how he’ll respond to a given socioeconomic environment.

        Any system that allows men to feudally compound organizational size and accumulate wealth and power will result in tyranny, no matter what the nominal form of the political system of ownership of the means of production.

        (I took it for granted we were talking about agricultural and post-agricultural civilizations, not earlier models, which is a whole different story.

        Man’s nature has several possible strange attractors, and right now we’re thrashing in the worst one.)

  6. MarcoPolo

    “Stability of status quo leads to overreach and instability”orGor a long & continuous illustration you would study Chinese history. Which, of course Mr Hu knows better than we.

    This recession is global. US policy/kleptrocracy doesn’t exist in isolation & it is that which places the solution out of our reach.

  7. KnotRP

    The common theme of Ed’s story is that bankers will, whether
    regulated or unregulated, eventually kill the economy,
    and then require the tax payers to rebuild the economy,
    so they can feed from it again.

    Arguing about regulation seems pointless.
    Maybe the Chinese method (a bullet to a few
    banker’s heads) might work, but I doubt this
    wrist slapping is anything but kabuki at it’s
    finest.

  8. paper mac

    Thanks for the post, Ed. It does not seem to be coincidental that the unconstrained operation of capitalism or free market ideology results anywhere and everywhere in massive inequality and kleptocracy. This is the normal function of capital accumulation. I am inclined to agree with you that markets have inherent utility, but I believe that they must be treated like other dangerous-but-useful goods and systems- their use and elaboration must be kept as low as reasonably achievable (the ALARA/ALARP principle). This also means that the regulatory authorities and government must be kept 100% seperate from the operation of markets, especially in terms of personnel. I am not optimistic that this can be achieved.

  9. Doug Terpstra

    Great post, Ed, if brief for the topic.

    But I’m a little puzzled why people are so forgiving of Greenspan. You write, “Even when you think Greenspan has learned something, he proves time and again that he just doesn’t get it.” This treats him like a doddering old fool with anitquated ideas, rather than a loquacious self-dealing criminal fraud and yes, a klepocrat, which is more likely. Remember immediately after ‘retirement’ Greenspan joined Paulson & Company, a firm that “earned” billions shorting mortgage banks, for a fat consultancy.

    These circumstances make Greenspan look like a crook to me, and your statement presumptively excuses him. I’m so sick of these guys getting away with crimes and IF, IF they ever charged, obfuscatiing and feigning reaganitis in order to run off with their loot and enjoy their sunset years.

  10. Tom Hickey

    This is exactly the criticism much “heterodox” economics, and not just Marxism, aims at orthodoxy. It’s hard to convince someone that he is in error when his job depends on the opposite. It’s also hard to admit you’re wrong when you are heavily invested in a graduate degree that programmed you otherwise. It’s AKA “intellectual capture.”

    1. Blissex

      In a book about a dot.com company, “High St@akes, no prisoners”, the author (a PhD political scientist) has an appendix devoted to how corrupt may be many economists, thanks to earning enormous amounts of money on the side with corporate consultancy and expert witnessing; and how these incentives apply to any up-and-coming ones too.

    2. jdmckay

      It’s also hard to admit you’re wrong when you are heavily invested in a graduate degree that programmed you otherwise.

      Perhaps not for all, but (in my observations) most of these “graduate degree” investments were mutual consent: the teachers taught, the students bought. It was an agreement.

      It is also my observation over last several decades that graduate, undergrad, or even trade school learning has gone from wide and deep focus of (at least honestly attempting) to equip students w/moral and intellectual abilities to solve problems: logic courses, critical thinking… eg: imbuing upon individuals (or at least trying) the ability to indeed, think for themselves.

      In many of the “graduate degree” professions which have produced those that fully participated in bringing corruption of our econ/financial/business/political (etc) functioning to critical mass we now have, their training was based on narrow focuses… how to do/accomplish very specific things, w/out a grounding in the “think it through” skills mentioned above.

      I’d suggest, if you want to get a look at incubator of all these burgeoning ideologues, attend meetings sponsored by your local Law School’s Federalist Society. Here (Albuquerque//Univ of NM), they bring in “speakers” from Claremont Institute, CATO, a couple other right wing “think tanks”, and these little f*&%ers send shivers down my spine… they embody everything embedded in corruption rampant throughout our government, finance, wall street…

      There is an article up on TNR:
      Upper Mismanagement
      Why can’t Americans make things?
      Two words: business school.

      Excellent article… author (Noam Scheiber) IMO identifies and articulates what I attempt to describe above, and does so in focus of MBA training. I think he comes very close to identifying a nexus of critical mass & leverage in what’s gone wrong.

      On a personal note, w/Scheiber’s thoughts in mind… I’m a programmer/developer (code monkey). Had a small privately held shop that (among other things) developed a comprehensive software management system for HIPAA regs that came into law just after Bush’s first inauguration. These things were the result of an effort that gained momentum in early ’97, was fleshed out over ensuing years in an RFC process which was participated in by interested professionals (medical, managers, suppliers, coders, programmers… ) in a big way. It was (IMO) done very, very well.

      Among other things, these regs attempted to address HC insurance co. behavior which used a bunch of shenanigans to delay payments to various providers: complicated forms, each company having different ones (non-standardized) with much of the information entirely non-essential or unneeded at all. An undotted “i”, a trivial misspelling… tons of stuff was used to delay payments to providers. 6-18 mos. was not only not unusual, but often for smaller clinics was standard fare.

      We went into the boardrooms of over 300 HMO/medical centers and smaller specialized clinics in process of selling our product. Over and over, especially from big HMOs, we heard the MBA/actuaries describe delaying of payment as part of their business model, and do so proudly: it was a strategy, and it “made us money”.

      More times than I can count the HIPAA software/management (the requirement that this be standardized/compliant became law in 3/01) discussions, for which we were there, were given trivial (a few minutes) consideration in these boardrooms. And these meetings were ostensibly called for express purpose of discussing/considering this stuff… “HIPAA Compliance” was the term.

      Among other things, the regs defined standardized forms, digitialized ‘em, and provided by law mandatory payment for proper billing submissions w/in 15 days.

      I heard HIPAA “consultants”, hired by many of these companies, describe their lobbying efforts to get Bush admin to delay/contravert implementation, and they were successful in doing so (many of the biggest HMOs still do not have this stuff in place). I also heard these same consultants entirely misrepresent the HIPAA regs… they literally didn’t know what they said.

      Personally, I’m at point where I really don’t know if democracy is a meaningful word. Clearly, our form of it is utterly corrupted, despite constitutional checks & balances etc. It seems to me there’s more than one way to skin a cat, and that political systems have various forms that work well and that fail utterly.

      The critical aspect in success or failure is the integrity of those pulling the levers. Lose the integrity, and you get failure.

  11. sgt_doom

    While I appreciate your need to sound scholarly by citing that corporate shill, Diamond, please allow me to redirect you to a real scholar and brilliant thinker, Prof. Joseph A. Tainter. Just persue some of his writings and books and you will have a far superior grasp on this subject.

    Now, for economic principles of any sort to apply, one must have an actual economy. Over the past thirty to thirty-five years, they soulless ones have been disassembling the American economy.

    Simple arithmetic, one need not even bother with Gaussian cupola functions nor binomial expansion technique variations, to comprehend that the American economy simply cannot numerically support the extraordinary number of (debt-financed) billionaires in existence today.

    They arrived at their fortunes by peddling debt — then saddled the lower 90% (and especially the lower 40%) with their debt — while absconding with the money.

    There is no economy, nor has there been any rudimentary amortization over the preceding thirty years (and this stimulus is just addressing it as a trickle in a torrential downpour), and the end result, coupled with jobs offshoring, etc., is the destruction of the US tax base.

    End of story.

  12. Dr Know

    Let’s specify within Diamond’s theory the function of asset value manipulation:

    As we have clearly seen in the years since 2001, when the creation of real wealth places too great a burden on the economy, the ruling class seeks to goose the nominal value of existing wealth through asset speculation, thereby providing the bread (real estate appreciation) and the circuses (CNBC) for appeasement of a restive populace whose real wages are in decline.

    A happy side effect of focusing on asset values is that the kleptocratic elite are themselves the principle holders of financial assets, thus they perpetuate their own privilege even when throwing slop to the masses.

    The slow motion unwind of this shell game, that we’ve come to call the credit crisis, is the only true hazard our ruling class faces to their position. The scramble is on to find some way–any way at all–to replace the wool over the peoples eyes. Obama’s call out of the “fat cats” on 60 minutes the other day, and the dismissive reaction that followed, is evidence of just how poorly this administration understands the depth of their challenge. The time for vague censure is long past, yet it is the conceptual limit of the administration’s imagination.

  13. Michael Fiorillo

    “stability of status quo leads to overreach and instability”

    Hmm,sounds like you’ve got a little dialectical materialist action going there..

    Old Grey Whiskers deserves a nod, no?

  14. Hugh

    I think much of what you describe is a plutocracy. The purpose of a kleptocracy is theft and looting of a nation’s wealth. Kleptocrats don’t care what the condition of the economy is. As we have seen the last couple of years, they don’t trim back their activities to allow the economy to recover. They simply shift to new looting opportunities as the old ones disappear. They will keep going until economic collapse or their own imprisonment stops them.

    A plutocrat will want to own and keep the goose that lays the golden eggs.

    A kleptocrat will sell the eggs and kill the goose.

    1. Blissex

      One way to summarize the asset bubbles of the past 20-25 years is that after the Oil Crisis and USA Peak Oil (and Peak Water) in the 1970s the USA ruling class realized that the USA was in decline, and started asset-stripping the USA. Even more so as the end of the Cold War opened new growth areas to mine.

      The techniques used for asset-stripping the USA have been the same used by any good corporate raider: take-out of good assets (which have been moved to China and India), load the USA with debt used to fund extraordinary financial profits and bonuses, and find and liquidate the remaining layers of fat. The latter have been found in the 401Ks and other savings of ordinary, greedy, stupid losers, and the asset strippers have proceeded to liquidate them as fast as possible, with all the usual confidence tricks.

      What have been corporate raiders been selling? Anything “financial”, anything “USA” (especially real estate) with a few exceptions. What have they been buying? Indian and Chinese assets, water rights, toll roads, …

      The clearest example of the game has been as usual GS: when they understood the times were right, they turned their jealously guarded partnership into a stock company, selling out at a very high price fancy shares in it.

    2. pebird

      While that is a bit of distinction without much difference, I think you might be a little overly optimistic if you think we live in a plutocracy.

      At least we are agreed it is not a democracy.

      Perhaps we are all basically on the sidelines watching the Plutocrats and the Kleptocrats fighting it out.

  15. Edwardo

    Edward Harrison wrote:

    “The gauges indicate danger but power is a powerful elixir that few relinquish willingly.”

    Frederick Douglass said it very well over a century ago:

    “Power concedes nothing without a demand, it never did and it never will.

    Attempter is spot on with the following observations:

    “Another way of putting this is that, contrary to the Big Lie of market fundamentalist ideology, men are not by nature “capitalists” who love to compete.”

    “They are by nature feudalists, gangsters, who won’t keep on “competing” for one day longer than they have to.”

    Eternal vigilance IS the price of liberty, and we citizens have failed to be vigilant. Now, as per Frederick Douglass immortal observation about the nature of power, it will require the application of more than vigilance to right the ship of state.

  16. Demented Chimp

    Ed “An unwritten assumption I made when I wrote the post is that humans are genetically programmed for fairness. My understanding is that scientific studies have convincingly demonstrated that human beings will actually consciously disadvantage themselves to seek revenge as a means of restoring justice and fairness.”

    This is not quite what the science says. We are not genetically programmed for fairness, but we do seek revenge and desire another’s wife/resources.

    1. On a genetic level we are altruistic/cooperative to others based on a sliding scale of how related they are to us identical twins, siblings, distant family, tribe etc.

    2. Our genes program us to punish cheaters those individuals that dont reciprocate acts of cooperation/altruism.

    3. We are resource hungry, more resources mean we can have more children and our genes like that. This is the basis of our resource jealousy and our desire to have more money/power. We don’t desire fairness we just want what he has.

    4. Every type of society is stratified with an alpha male at the top. We are genetically programmed through 10 of 1000s of years of evolution to accept this dream that some day it might be your turn to become number 1. Stratification or leadership brings a more efficient coherent unit from the primate family to a tribe. It used to be based on ability to kick ass now its based on shuffling numbers around. ALL SOCIETIES ARE UNEQUAL just some have larger populations and more levers of power/manipulation. There is no such thing as a noble savage or tribe just fewer people to screw.

    These underlying biological mechanisms are then overlaid with our consciousness created cultural memes of our modern societies religion/politics/markets/science. These to some extent reflect the genetics mechanisms at play in our subconscious. We are built to accept inequality in the short term (for the moment whilst we scheme against the alpha males), punish blatant cheaters (madoffs), hate foreigners, love our family, horde and consume and reproduce more of me.

    All these interwoven mechanisms mean we do not behave in a rational manner as economic agents. No economic model has been able to model our behaviour and I don’t believe they will for some time to come.

    BOTTOM LINE EVERY SOCIETY IS UNEQUAL. ITS PART OF BEING HUMAN AND HAVING TO INTERACT WITH OTHER HUMANS.

    1. pebird

      This sounds like a justification for deep cynicism. So, the concepts of individual liberty and personal freedom are only head fakes used to get a leg up on those we deceive? Given the current social climate, I can almost buy that.

      But what if humans are also able to see that if we continue to reproduce like a yeast culture in a Petri dish, the entire population will crash? So we need to do hard work of unlearning millennia of what is now dysfunctional hard wiring. Maybe that isn’t as difficult as we think.

      Instead of justifying the current situation with Panglossian shoulders shrugged, the evolutionists / biological mechanists would do all of us better by discussing how nature adapts quickly to new conditions as species survival is more important than individual survival.

    2. JTFaraday

      “3. We are resource hungry, more resources mean we can have more children and our genes like that.”

      Oh they do, do they?

  17. michael

    Jared makes a statement:
    “more stratified societies are by definition … more efficient”
    Maybe we should first ask ourselves: why is that so?

    Then you write:
    “Markets are wonderful. A largely market-based economy is certainly more ‘efficient’ than a non-market based one (ask the Soviets). But, markets are not self-regulating. They fail – and catastrophically so. But no manner of real world experience seems to shake ideologues’ free-market zeal.”

    Now what’s the problem here? Is it ideologues’ free-market zeal? Or isn’t it the non-existence of free markets, or something close enough, by NOT letting things fail but bailing them out instead?

    Markets without bankruptcies is like law without punishment.
    And before the usual blather starts about letting systematically important companies fail: maybe we all should instead spend our time to discuss how we can let “TBTFs” fail without disrupting society!

    1. Bill Smith

      Don’t let them get to big to fail? Remember these companies don’t want free markets and we haven’t had them.

      Of course the original point of the post (Kleptocracy) will hinder the ability to do anything about it.

  18. Paul Tioxon

    Kleptocracy, or rather Plutarchy, the social order ruled by the wealthy, the few wealthy, a combination of plutocrats and oligarchs. Kleptocracy, could be a gangster or warlord/druglord type of arrangement, but the real bang for the buck in understanding the systemic exploitation of one group of people by another, institutionalized and reinforced by propagating a world view that is delivered by formal channels of society’s communication infrastructure, mass media, the pulpit, the classroom and the factory/office floor. Why don’t you just make this exercise easier and just employ Marxist class analysis. Or even some contemporary analsis. The modern day sociologist William Domhoff can be easily seen on youtube as well as on the web. His book, Who Rules America is empirical sociology that clearly explains the phenomenon without resorting to the evolutionary theorizing of Jared. Not that there is anything wrong with that. But this is such a to the point kind of forum, we really do not have to get into thousands of years of socialization to understand that we are exploited ruthlessly, generation after generation by the same type of people who are in many cases the blood relatives of the oligarchs who set up this country. Senator Byrd Jr, from Virginia up until 1983, and his father also the US Senator has a colonial ancestor whose diary is mandatory reading for American History majors, The Secret Diary William Byrd of Westover. That dates from 1709. It is easier to simply map the people in power, draw the interlocking connections and show how the policies that they promote in their various associations, think tanks, institues etc. coincides with repeated legislative success, century after century, up until today in the health care reform legislative process. I mean really, free markets, Hayek, Polyani, the next thing is someone will be going all mythopoetic with Vicco. There is some very easy to understand, to the point explaination of power in the country and you do not have to wait until the complete destruction of pricipia media of the system to lay bare the de facto political subjugation suffered by most of the people most of the time. The saving grace is that most of us are needed most of the time to make profits, fight wars and N America is so rich and bountiful, we are able to support a great lifestyle for hundreds of millions. The meager political reforms from The Civil War, The New Deal and the Great Society/Civil Rights reforms went a long way, with the help of technology breaking up old oligarchic groupings. This crisis is a great opportunity to grab more freedom and redistribute some wealth back down from the upper strata.

  19. dugger

    Ed,
    Nicely written analysis. The inevitability of some kind of correction is certain: But when? I am perplexed by the great quiet pause, expecting a more “Rodney King” type of popular reaction in the streets, post AIG/Goldman/Deutschbank. Instead, it appears the public response to Kleptocracy will be unleashed on an outside group much the same way Nazism focused public anger on the Jews, then the French. I expect the Islamic world will bear the brunt of America’s anger.

  20. Blissex

    «I am perplexed by the great quiet pause, expecting a more “Rodney King” type of popular reaction in the streets, post AIG/Goldman/Deutschbank.»

    The bigger problem with the USA is not that the elites are corrupt asset strippers, it is that the majority of voters are corrupt asset strippers too, driven by the mirage of becoming “lords of the manor”, and to become able to proudly bellow “F*ck you! I am fully vested” to the losers they would leave behind. Thus the national obsession with asset price bubbles. USA voters have been absolutely and enthusiastically complicit in the past 20-25 years of their own asset bubbling and stripping.

    The strategy used by the corporate elites is that they have made their victims subscribe to their own ideology, tempting them to disregard their scruples, as they would become rich winners only if they did; and since there is no honor among thieves, USA voters cannot really complain when they have been screwed by thieves better than themselves.

    One of the beauties of defrauding the dumb partners of the fruits of a fraud is that they cannot complain as they were trying to do the same themselves.

    «Instead, it appears the public response to Kleptocracy will be unleashed on an outside group»

    Or several, like any “outsider”, the welfare queens, the strapping young bucks, “losers” in general, foreigners, brown or dark colored skins, …

    «much the same way Nazism focused public anger on the Jews, then the French.»

    In the case of the French that anger was not unfounded, as the French very unwisely chose to be absurdly mean to the (not quite) defeated Germans.

    «I expect the Islamic world will bear the brunt of America’s anger.»

    Because the destruction of Iraq “pour encourager les autres” (which terrified even Ghaddafi into compliance) and of Afghanistan (for much better reasons) haven’t been done already? :-)

  21. Andy Gardner

    “Fair” is in the eye of the beholder. Is it unfair that “U.S. average hourly earnings peaked more than 35 years ago” — or is it an merely an indication of the lack of international competition in manufacturing that the US faced post-WW2 and its effect on demand for high-school educated males? Is it “fair” that the most productive pay 40% of their earnings and that 40% of our citizens pay no income tax? There are no clear answers. “Fairness” sounds great; but, what does it mean? Is it the “Mom, my brother has X, I want one too” ? But what if mom’s answer is “Your brother worked to pay for X and you didn’t do Y or Z” ?

    Perhaps more to the point, how comfortable should one be having government deciding what is fair and what behavior should be punished or rewarded based on what sounds good as a political talking point?

    I think that strong arguments can be made on behalf of progressive policies. But, I think that the arguments should be made on the basis of increasing productivity and opportunity where market fail (i.e., basic research, education, pollution) — not on the basis of class warfare. Of course, the challenge for progressives is then to show that their policies are actually working; whereas, if their opponents are members of the “kleptocracy”, they are off the hook (a little like Bush’s administration could dismiss their political opponents as emboldening terrorists by questioning his policies).

  22. Jim in SC

    I am quite skeptical about the idea that there is a kleptocracy or plutocracy in charge in the US. This idea has been perpetuated by Charles Beard in An Economic Interpretation of the Constitution and Ferdinand Lundberg, in America’s Sixty Families and The Rich and the Super Rich. Our economy changes too quickly to perpetuate a plutocracy. The names on the Forbes 400 change a lot over a decade. Many people who were once rich become a lot less rich over time, as they have more children and divorces and spend their money. Not to mention see it taken by taxes and inflation. How many Vanderbilts are superwealthy today?

    It is actually pretty easy to get from nothing to being worth $1 million to $10 million over forty or fifty years or so. Want to know the formula? Save and invest. Nobody wants to make the effort. They’d rather spend and enjoy now. Where exactly is the justice in taking the money of someone who sacrificed and invested his or her entire life to satisfy an estate tax? When you figure this out, you can have a degree in moral philosophy.

    1. pebird

      I think you need spend a little time doing some genealogy research.

      While the US is certainly more dynamic than Europe, I would argue that the trend is toward more consolidation of power into fewer groups.

      Population size can be deceiving, now that we have 300MM plus residents, there are more wealthy from an anecdotal perspective, but there should be no argument about income distribution and wealth concentration trends.

    2. Blissex

      «It is actually pretty easy to get from nothing to being worth $1 million to $10 million over forty or fifty years or so. Want to know the formula? Save and invest. Nobody wants to make the effort. They’d rather spend and enjoy now.»

      This is just the usual an knowingly dishonest propaganda that apologists for the kleptocracy tend to use.

      Let’s say that the median unproductive and uncreative usian is a parasite producing only $40,000/y (in the 25-64 age range):

      http://en.wikipedia.org/wiki/Affluence_in_the_United_States
      http://en.wikipedia.org/wiki/Personal_income_in_the_United_States

      wanted to become a millionaire saving 10% of their income every year. That’s $4,000/y. At a rather optimistic real return rate of 3% (see note below) assuming that there is never any interruption in the payments as there is no catastrophic illness or accident or unemployment or need to fund a degree for children one will get after 40 (very lucky) years around $300,000.

      To get to $1m one has to invest $14,000 every single year for 40 years, without missing a beat. That is roughly 30% of the pre-tax income of the majority of (loser, unproductive, uncreative) usians.

      To get to $10m in 40 years (who has got 50 years of stready income?) one would need to pay only a bit over $130,000 per year.

      Isn’t that “actually pretty easy”? Sure, if you are one of the productive and creative heroes of the USA economy, one of those financial salemen or investment bankers who earn $500k plus a year (for 40 years steady enough).

      What if our (loser, unproductive, parasitical) median usian on pretax $40k/y cannot save $4k/y aftertax every year for 40 years without missing a single payment? Let’s say only for 25 years. Then they get the princely sum of $146k.

      Since to get to $1m of wealth in 40y one needs to save $14k per year, let’s say that one can save 25% of income for 40 years (that requires a big effort, that’s not at all “actually pretty easy”); that requires to have an income above $56k for 40 years without fail, that is to be in the top 40% of earners from age 25 to age 64.

      It seems to me a fantasy that it is “actually pretty easy” to “Save and invest” your way to wealth in the $1m-$10m range in the USA for the median usian.

      That the median usian 25-64yo makes $40k/y (and that 60% of usians earn less than $55 and 80% less than $90k) is on Wikipedia, and real GDP growth rates are also well known, and the ‘FV’ function to calculate compounding of an investment are part of most any spreadsheet program.

      So I think it it not a fantasy but knowing dishonesty for someone to assert that “Save and invest” makes it “actually very easy” unless they are thinking, but not stating it, of the productive, creative top 10% of the population who earn $120k or more; actually for those within that top 10% who earn $120k at 25 and stay in the top 10% for 40 years and are then able to save fairly easily $14k/y or more and build their wealth to $1m or more by age 65.

      Note on 3% real return/y: the average long term investment cannot grow faster than GNP, or else over decades investment rents would grow to over 100% of GNP. Sure, investement rents can grow faster than GNP for a while, if GNP is redistributed as in the past 25 years from earned income to investment rents. But still over a period like 40 years it is impossible for most investments to grow faster than GNP, and GNP growht rates for advanced economies top at around 3% (optimistic). Only the best and most skilled investors can in practice get long term real returns of as much as 3%; the others usually get a lot less.

      1. ModelCitizen

        You’re assumption is wrong regarding the behavior of income earnings and growth. A worker doesn’t face $40k over 40 years, there is growth in income as well as growth in the investments. Therefore your numerical calculations are incorrect because they do not give an accurate reflection. Maybe you should take some actuarial courses to be more informed. You are also adjusting for inflation, which is caused by the government, so you may want to look at them to stop hurting our most vulnerable people on fixed incomes.

        Plus, you cannot say that the 15% social insecurity tax is a greater benefit than that income being tax-free and used to purchase CDs.

        Blissex, saying that there we’re not taking people, we’re taxing their estate is disingenuous and an equivocation. People save for years to provide for their children; the very act of having a child forgoes current consumption to provide a ‘windfall’ benefit for the child. Your reply to your own post just seems like a lot of effort to make a statement about something no one is even advocating.

        Any talk of government intervention due to ‘market inefficiency’ should also examine real government inefficiency. Have any of you ever been to a DMV? Many of you statists/socialists decry the war, what about that inefficiency? They are they ones with the guns removing choices from the market.

        We all ‘know’ that these CDOs based on subprime were bad and the bad companies tricked people and caused the crash right? Well Ed’s previous post on this site, mere paragraphs away he states that the FedGov had a historical average of 50% of the mortgage market and now it’s closer to 90%! Ohh no but it was the free market that caused the crash!

        You can just feel the agony of Ed’s brain attempting to comprehend this sentence: “Fed Chairman Alan Greenspan was an adherent of this ideology despite holding a central planning position as Federal Reserve Chairman which was antithetical to the views he espoused.”

        This is an awesome sentence, one that is analogous to modern economic academia – if an observational doesn’t fit my ideology I cannot fathom to square it. It is merely tossed away as an ‘outlier’ or maybe recorded, quickly written off as meaningless. I really wish someone else had written this next view, but it’s ironically fitting in many ways for our discussion: “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.”

        So is Greenspan really a radical free-market zealot? Or maybe the views he espoused were meaningless when compared to his actions. What were his actions? Were they the actions of a free-market zealot? Or did Greenspan take the actions of a socialist central planner bent on enriching himself and his politically connected friends? He was and is a corrupt dirty socialist.

        He set the going rate for trillions of dollars of economic activity, with no supervision, accountability, or even justification; quite literally arbitrarily. Should it be 2% or 1%? 5% now? Why not 4.5? Why not! Yes, unaccountable bureaucrats with limitless political power are the champions of free-market libertarians.

        1. Blissex

          «Blissex, saying that there we’re not taking people, we’re taxing their estate is disingenuous and an equivocation.»

          It is indeed, that is exactly what I wrote:

          «The estate tax will be paid by the estate, in practice by the heirs, who would usually have just inherited a windfall.»

          The estate tax is assessed on the estate, but in practice paid by the heirs. That it is assesses on the estate pre-distribution is a great scam, to avoid progressive taxation, because the distributed amounts should be taxed as income on each of the heirs, at their progressive rate. A heir with a huge income will be taxed on their windfall at the same rate as a heir with a small income.

          «People save for years to provide for their children; the very act of having a child forgoes current consumption to provide a ‘windfall’ benefit for the child.»

          That is a spending decision by the parent, and anyhow the child is not taxed for the notional income they receive from their parents for their upbringing. But then whether the heirs are the children of the deceised or not, the estate they receive is windfall income, and it gets taxed like all windfall income.

          Suppose a poor man has saved $10k and knows that he will die in one year. He has two choices:

          * Give the $10k during that year to hookers and enjoy a lot of sex in that last year. The hookers will pay income tax on that $10k he will spend on them, and they will work for that.

          * Leave the $10k after that year to some heir. The heir will get the $10k tax free for that unearned windfall.

          Why would the heir “deserve” to get a $10k windfall tax free and the hookers “deserve” to pay tax on the $10k they have earned?

          No man is forced to pay inheritance tax on his wealth — indeed he cannot pay it. Any person also has two choices as to what to do with their wealth: spend it, giving it to suppliers and workers, or leaving it, giving it to inheritors (not necessarily their chilren).

          If he decides to spend it, why should those who receive his wealth as suppliers and workers have to pay income tax on it, and why should those that receive his wealth as inheritors pay no tax on that income?

          Or is it the argument that investment rent is deserved and the children of the wealthy superior and should be exempt from taxation while the income of workers is undeserved and workers inferior and should pay tax?

        2. Blissex

          «A worker doesn’t face $40k over 40 years, there is growth in income»

          Really? Please provide proof that applies to most usians.
          The story I know is that hourly wages have not grown for 35 years.

          «as well as growth in the investments.»

          In the long term at around 3% (real). With ups and downs — for example in the past ten years the rate of return on stocks has been 0%, even if has been much higher than 3% in the previous 10 years.

          «Therefore your numerical calculations are incorrect because they do not give an accurate reflection.»

          They are absolutely correct — to get to $1m in 40 years at 3% compound one has to save $14k every year. How many usians in the 25-64 range can afford to do that every year? The claim here is that “it is actually very easy” to do that, please provide the evidence for that, if you think that 90% of usians earning less than $90k is not relevant.

          «You are also adjusting for inflation,»

          Not at all, not even remotely — my numbers assume 0% inflation, just to show how difficult and long it takes to build savings in real terms.

          «which is caused by the government,»

          Is it? There was plenty of inflation in the past even in places with no government. The USA had a fully privatized financial system with no federal currency and with minimal government for most of the 19th century, and both inflation and deflation have occurred then, thansk to wildcat banks. The miracle of the USA government in the past 25 years is that they have effectively recreated wildcat banking (Bear Stearns, Lehman, Citigroup, Goldman Sachs, …), this time with government backstop.

          «so you may want to look at them to stop hurting our most vulnerable people on fixed incomes.»

          That was done by FDR and the New Deal something like 70 years ago, and it is called OASDI (Insurance against poverty in Old Age, for Survivors and for the Disabled), and by regulating stocks and financial markets to prevent wealthy shysters asset stripping widows and orphans.

          Both of which have been greatly weakened by successive “reforms” in the past 25 years.

          1. ModelCitizen

            It seems there is a contradiction arising out of your statements – why is it fair to not tax heirs but tax others? I agree it is not fair to tax either. But those saved earnings were family vacations never taken, better food, clothes, toys not provided so that their future would be more secure. The future came and things worked out, so they give the gift of those sacrifices in an inheritance. Plus if there was higher time preference (spending now and not saving), interest rates would be higher and there would be less investment, leading to less future incomes. Government destroys the future to pay for now with it’s taxes and unserviceable debt. Besides, the rich just make a trust and corporation for their assets. Your criticism of inheritance is unjustified and really irrelevant.

            Uhm, does anyone you know start out at $40k when they are 22 y/o right out of college and keep that same wage for the next 40 years? You say “in the long term at around 3%(real).” What does that ‘real’ stand for? Inflation?

            What really happens is wages increase over a workers life as they gain skills and seniority.

            Plus investing in riskier assets early in life should pay off much better than 3%. You’re ignoring portfolio asset allocation and many other realities to prove a point that it’s hard to make it in this country. So what’s your solution? Even more incompetents ruling/stealing from us to ‘protect’ us.

            Anyway, by the age of 25 I have $30,000 already saved. I made $55k last year in a city with about the average income in the US. My father came from another country without a cent and didn’t speak english, but he worked his ass off and never took a cent of welfare (other than back-end subsidies in roads, police, etc, which he paid taxes for of course). So apparently in my young age I am already years past your difficult goals and am very very lucky, and of course this is all in the environment of -40% S&P in 2008. Wow how could I *ever* be so lucky??

            Yes inflation is caused by the government – they control the money supply and the banks. The banking industry was and is the most regulated industry in this country. The Fed creates money out of thin air and fraud.

            Letting people keep that 15%, which really has been asset stripped by congress, and letting them buy 5% 5yr CDs is a much better than congress-creepers literally stealing all of that money to drop bombs in other countries/pay off their friends. The real ponzi scheme is social security.

          2. Blissex

            I had written:

            «Note on 3% real return/y: the average long term investment cannot grow faster than GNP, or else over decades investment rents would grow to over 100% of GNP.»

            This reply:

            «Plus investing in riskier assets early in life should pay off much better than 3%. You’re ignoring portfolio asset allocation and many other realities [ ... ]»

            is typical of the financial imbecility of many investors who want to believe in the tooth fairy. Sure, riskier investments return more, but over a period of 20 or 40 years or over a large mass of investors that risk happens.
            Otherwise why would anybody invest in less risky investments with lower returns, if risk never happened?

            What matters for long term, large numbers investing is the risk adjusted return rate, and guess what, that is rarely if ever higher than the GDP growth rate.

            «to prove a point that it’s hard to make it in this country.»

            That’s entirely false: it is possible to make it in the USA! That’s easy if one is born of rich parents, is given a trust fund that funds an Harvard MBA or JD, and one goes to work for Goldman Sachs or other Wall Street institution, where one’s superior productivity and creativity creates a colossal amount of wealth. These are the rightful WINNERS, and they make it big time. The other are LOSERS and they deserve a life of misery, and anyhow it is bad taste to even mention them, they are not Real Americans.

            «So what’s your solution? Even more incompetents ruling/stealing from us to ‘protect’ us.»

            The heroes of productivity and creativity with Harvard MBAs and JDs are not “incompetent”, they are very shrewd WINNERS and are very good at protecting LOSERS from the risk of a soft life and a restful retirement by relieving them of their money, with many clever and entirely legal techniques.

            One of their favourite techniques is to tell them that “investing in riskier assets early in life should pay off much better than 3%”, and then charge them rich fees for such fabulous revelations.

  23. Jim in SC

    That said, there are plenty of reasons to be unhappy with the banking class. They claimed to be the product of a rigorous meritocracy. The right schools, the right resumes, etcetera. They were smarter than the rest of us could ever be, and so they deserved all the money they made, particularly seeing how hard they worked.

    In fact, they were making their money in one way or another by being at the right place at the right time and borrowing tons of money to buy assets that were going up in value for one reason and one reason only: a generational decline in interest rates, now at its end.

    As Sgt Doom says:

    ‘They arrived at their fortunes by peddling debt — then saddled the lower 90% (and especially the lower 40%) with their debt — while absconding with the money’.

    Damn right we’re mad. I’m beginning to think that we were better off with stronger class systems in the US, such as existed before WW2, rather than being saddled with a meritocracy that is only concerned with how much money they
    are going to make. The ‘meritocrats’ of banking are not beholden to any system of ethics, nor can they be ‘shunned’ or controlled by the opinions of their class, since they are classless. Their sense of entitlement comes from being smarter than everybody else. Only they were not so smart that they realized they were making their money because of chance, i.e…the decline of interest rates.

  24. molecule

    “But freshwater economists have this view that the economy is always self-equilibrating and this means government must be held at bay any- and everywhere lest it reduce the efficiency of the free market.”

    Government does *not* reduce the efficiency of the market, generally speaking. Only when you have clear masures such as the supply of “affordable housing” or “affordable healthcare” does the government make things worse. Nobody wants affordable housing these days anymore, for some reason.

    When you fix the price of credit too low(FED), you get a boom in credit. The market responded to the new conditions. It worked. It innovated to maximize profit for the participants. Markets work. Get used to it.

  25. Blissex

    «Where exactly is the justice in taking the money of someone who sacrificed and invested his or her entire life to satisfy an estate tax?»

    This sounds to me like a knowingly dishonest argument: because the person that “sacrificed and invested” will never pay A SINGLE CENT OF ESTATE TAX. This is easy to prove: the dead cannot pay taxes.

    The estate tax will be paid by the estate, in practice by the heirs, who would usually have just inherited a windfall.

    In any case someone must pay taxes, and since your argument is that people who are rich got rich by being productive and deserving, and thus should not be punished by STEALING THEIR PROPERTY (even when they are dead), obviously the consequence is that taxes should be paid by the less productive and profligate, the underserving, parasitical poor, and should be higher the poorer (and thus less productive and more parasitical) the taxpayer.

    This is exactly my proposal to TAX POVERTY INTO HISTORY:

    1. Blissex

      This is exactly my proposal to TAX POVERTY INTO HISTORY:

      * 50% tax rate for the economic saboteurs and parasites that contribute less than $30,000/y to the national income.

      * 35% income tax rate for the slow, not-trying hard enough layabouts who only contribute less than $60,000/y to the national income.

      * 25% income tax rate for the barely productive people who contribute less than $100,000/y to the national income.

      * 10% income tax rate for those productive enough to contribute up to $500,000.

      * 0% tax rate for those earning between $500,000 and $1,000,000/y, as their reasonable productivity should be be discouraged by punitive taxation.

      * 10% Extra Incentive Tax Credit for those productive and creative heroes of the USA economy whose productivity contributes at least $1,000,000/y to the national income.

      And similarly of course for estate taxes.

      :-)

  26. Blissex

    «those within that top 10% who earn $120k at 25 and stay in the top 10% for 40 years and are then able to save fairly easily $14k/y or more and build their wealth to $1m or more by age 65»

    Actually it may be difficult for them too, as many struggling “middle class” people on $250k/y claimed that they would find it difficult to pay slightly higher taxes under the Obama plan, as they barely managed to get to the end of the month:

    http://www.businessweek.com/debateroom/archives/2008/06/250000_isnt_ric.html
    FELAM
    June 11, 2008 01:20 AM
    San Francisco Bay Area Monthly Expenses:
    Mortgage/insurance for modest 3-bedroom house: $5,200
    Car payment/insurance/gas on 2006 Toyota Van: $1,100
    Health insurance for family of 4 paid out of pocket: $1,280
    Groceries for 4: $1,800
    2 kids college savings: $1,000
    Utilities for house:$1,000
    Misc. Family Expenses: $2,000
    Retirement Savings (company does not offer any kid of retirement): $2,000
    That’s $13,580 a month I shell out just to exist. I am by no means rich even though our combined salary is close to the $250,000 a year. There isn’t much left over. Look further up the ladder because you haven’t found the rich here.»

    Note how this “middle class” struggling family on $250k/y combined income manages to save only $2k/month for retirement (because the mortage of course does not count).

  27. Jim in SC

    Your attitude, Blissex, is exactly the same as the attitude of many attorneys. That it is dead people’s money, and so fine for them to milk (given that they, like the banksters, are so much smarter than everyone else). I think that we do, in fact, respect the intentions of the deceased in other ways, such as by not allowing desecration of graves, and that it is only just to respect their intentions further by sending their money where they intended it to go.

    Estate taxes deplete capital and destroy jobs, and make it more difficult for family owned companies to compete against corporations. We have gotten to our sad economic state because of abuses within the corpocracy. They don’t need any more help from the government.

  28. Blissex

    «it is only just to respect their intentions further by sending their money where they intended it to go»

    So it is “only just” for the deceased to wish that their heirs don’t pay taxes, while other people pay taxes? What makes it “only just” for the deceased to have a say in who pays taxes and who is tax exempt?

    Wouldn’t it be “only just” for the deceased also to will that anybody they gave some money to in exchange for goods or services should also not pay any tax on that?

    To me it sounds ridiculous to argue that a particular form of income should be tax exempt because the deceased want it so. Taxes are not assessed to reward or punish people, or to “respect the intentions of the deceased”, but to spread the cost of public services among the population who have agreed to fund those services.

    Why should heirs be exempted from paying their share of that cost in order “to respect the intentions of the deceased”?

    Of all the ridiculous ideas of why heirs should be tax exempt on their windfalls (and most are, and those that pay windfall tax pay it on a non-progressive schedule unlike people who earn their money) the above seems one of the most comical.

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