“Capitalism After the Crisis” and “Free Markets” Newspeak

Reader Don B pointed out a generally top notch piece by Luigi Zingales at a new publication, National Affairs, on how the financial crisis may change attitudes towards what he calls “democratic capitalism”. Even though the article is thoughtful and well written, it does fall prey to a major bit of intellectual sloppiness that is common and I believe played a role in getting us into this mess.

First, some key elements of Zingales’ argument:

The nature of the crisis, and of the government’s response, now threaten to undermine the public’s sense of the fairness, justice, and legitimacy of democratic capitalism. By allowing the conditions that made the crisis possible (particularly the concentration of power in a few large institutions), and by responding to the crisis as we have (especially with massive government bailouts of banks and large corporations), the United States today risks moving in the direction of European corporatism and the crony capitalism of more statist regimes. This, in turn, endangers America’s unique brand of capitalism, which has thus far avoided becoming associated in the public mind with entrenched corruption, and has therefore kept this country relatively free of populist anti-capitalist sentiment.

In fact, corruption and concentration of power are all relative; America has had a proud tradition of robber barons of various sorts. But Zingales stresses that the US has avoided, at least so far, having an entrenched upper class:

In a recent study, Rafael Di Tella and Robert MacCulloch showed that public support for capitalism in any given country is positively associated with the perception that hard work, not luck, determines success, and is negatively correlated with the perception of corruption. These correlations go a long way toward explaining public support for ​ America’s capitalist system. According to one recent study, only 40% of Americans think that luck rather than hard work plays a major role in income differences. Compare that with the 75% of Brazilians who think that income disparities are mostly a matter of luck, or the 66% of Danes and 54% of Germans who do, and you begin to get a sense of why American attitudes toward the free-market system stand out.

Some scholars argue that this perception of capitalism’s legitimacy is merely the result of a successful propaganda campaign for the American Dream — a myth embedded in American culture, but not necessarily tied to reality. And it is true that the data yield scant evidence that social mobility is higher across the board in the United States than in other developed countries. But while this difference does not show up in the aggregate statistics, it is powerfully present at the top of the distribution — which often gets the most attention, and most shapes people’s attitudes. Even before the internet boom created many young billionaires, in 1996, one in four billionaires in the United States could be described as “self-made” — compared to just one out of ten in Germany. And the wealthiest self-made American billionaires — from Bill Gates and Michael Dell to Warren Buffett and Mark Zuckerberg — have made their fortunes in competitive businesses, with little or no government interference or help.

Notice how the piece is already getting a bit slippery. The polarity is between “freedom” and “government interference or help.” JP Morgan, the Rothschilds, the Japanese zaibatsu (save latecomer Mitsubishi) built long lived enterprises without government support; indeed, the Rothschilds could make or break governments. Even the Krupps, which later became inextricably associated with German rearmament before and during World War II, was an innovative steel-maker and was in the mid 1800s a supplier to multiple national armies, rather than dependent on German patronage. The idea that concentrations of power can arise due solely to competitive dynamics such as economies of scale, network effects is absent, and there is curiously no mention of the role of once more punitive estate taxes (readers are welcome to correct me, but I believe as recently as the 1970s, the top rate was 70%) in limiting intergenerational transfers of wealth in the US.

But the article had started getting on thin ice a bit earlier:

Capitalism has long enjoyed exceptionally strong public support in the United States because America’s form of capitalism has long been distinct from those found elsewhere in the world — particularly because of its uniquely open and free market system. Capitalism calls not only for freedom of enterprise, but for rules and policies that allow for freedom of entry, that facilitate access to financial resources for newcomers, and that maintain a level playing field among competitors. The United States has generally come closest to this ideal combination — which is no small feat, since economic pressures and incentives do not naturally point to such a balance of policies. While everyone benefits from a free and competitive market, no one in particular makes huge profits from keeping the system competitive and the playing field level. True capitalism lacks a strong lobby.

That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one, though American capitalism has always managed this tension far better than most.

This section illustrates the sort of muddy headed thinking about “free markets” that is not simply annoying, but I believe played a much greater role in creating the conditions that led to the crisis than most realize. First, the sort of rules that Zingales argues are necessary for a “free and competitive” market, as in limiting power concentrations, are in fact directly contradict the sort of “free market” idea espoused by libertarians and staunch follower of Milton Friedman, which views government action of any sort save the bare minimum (defense and a court system) as “interference”. That vision is in fact close to anarchy. So you have people using the same term to mean quite different things, but the zealotry of the “free market” fundamentalists means that people who use the same phrase to use something more moderate wind up seeming to endorse the more extreme version.

Second, Zingales’ “pro market” versus “pro business” lobbying construct has broken down since the 1970s. Big businesses started an organized campaign in the Carter adminsitration, arguing that regulation were interfering with their ability to innovate. The claim was utter rubbish. There was no evidence of a slow-down in innovation or invention. Moreover, a robust body of research showed that the the big businesses that were calling for fewer rules were not innovators. Small and mid-sized enterprises are the locus on new ideas and procedures (indeed, there was a whole industry of books and consulting practices in the 1980s trying to help big companies figure out how to be innovative).

“Free markets” is an amazing bit of Newspeak. Unlike “free enterprise” which clearly implies that business in the beneficiary of more liberalized rules, “free markets” creates the illusion that everyone automagically benefits. Zingales unwittingly endorses that idea by offering a false dichotomy between “pro market” and “pro business” when business has taken up the “free markets” branding to promote deregulation, particularly in financial services, that led to the concentration of power than Zingales decries.

With that huge caveat, the article is still worth reading, and you will find it here.

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  1. Edward Harrison

    Yves, very nice analysis. I would point out that Germany’s resurgence after World War II was built on the back of the Mittelstand – privately owned entrepreneurial companies that define the free-market capitalism of which Zingales speaks.

    Knowing this, I have to agree with you that Zingales’ America-as-shining-beacon-on-the-hill rhetoric rings hollow. It is arrogant and misguided, detracting significantly from anything else of note he does say.

  2. purple

    Bill Gates’ family had contacts to IBM’s CEO through the United Way executive board. No doubt those connections helped him land his initial contract with IBM. The rest is history.

  3. BwO

    I think Yves is being a bit unfair here. As she points out, corruption and concentration of power are all relative. So the question is not whether the US has perfectly open markets, nor whether you can find examples of open markets elsewhere, but whether, in general, the US system has been more supportive of open competition. It’s not ‘arrogance’ to say that it has, and to say that it has something to do with the success of the country, and that we are in danger of losing (more of) it.

    I also don’t think that the thinking about free markets is at all muddy headed in this piece. His point (here and elsewhere) is to distinguish between what currently passes for a “free market” and a market with real competition, and to say that there’s no concentrated lobby for more competition, because it produces less profits. Yes, the term “free markets” has historically gotten abused by people who equate freedom with anarchy, but let’s not go muddying the waters further by introducing “free enterprise”. Instead, let’s just talk about capitalism — a good name for a system in which capital is able to make more capital — and markets — a system where everyone is at the mercy of supply and demand, no one controls the rules, and the only way to get ahead is to keep competing to give people what they want.

  4. Anonymous Jones

    Not to pile on Bill Gates, but without IBM’s tremendous strategic blunder to focus on the hardware, Bill’s OS empire would have never existed. If that’s not ‘luck,’ I don’t know what is. That is not to say that he might not have been successful in some other venture but please, we’re all lucky that we didn’t get run over by a car this morning (or mowed down by a drunk driver and put in a wheelchair when we were 11). There are hundreds of thousands of “forks in the road” faced in a long life, and to attribute all success (and avoidance of catastrophe) solely to one’s own efforts is the height of imbecilic delusion.

    On another point, and I’m sure I’ll be pilloried for this, but no matter how many idiotic ideas Hayek may have later had, it doesn’t mean *all* his ideas were idiotic. If one actually reads The Road to Serfdom, one would discover that he does not promote the current naive construct of “free markets,” but instead he actually promotes a culture of competition. As Yves notes, many “free” markets are not competitive because of natural factors such as network externalities. Continuing to promote “free markets” after listening to just a five minute lecture on externalities (both positive and negative) would be another shining example of an imbecilic mind. I am constantly amazed that something that is learned in the first month of an intro econ course (the concept of externalities) is so often ignored by the supposedly sophisticated “free markets” crowd.

    1. jest

      Not only that, but Hayek was in firm support of state sponsored social insurance programs:


      “Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong…

      Friedrich Hayek, The Road To Serfdom (Chapter 9)

      It just goes to show that the “free markets” set knows not of what they speak.

  5. Yves Smith Post author


    The reason for invoking “free enterprise” is no that I endorse the term. I find conflating the idea of freedom with a system that entails rules to function well to be the root of a lot of confused thinking. I use the term “free enterprise” because in the 1950s and 1960s, that term was used far more often by big business to promote the idea that what they did was desirable than “free markets” which as I indicated, I find to be slippery. “Free enterprise” at least signals the alignment with commercial interests.

  6. john c. halasz

    “automagically” – Was that just a felicitous typo?

    Bill Gates is a convicted, if scarcely punished, practitioner of illegal monopolistic policies, who never invented anything original,- (the graphical user interface was invented by Xerox researchers and first marketed by Apple),- but rather rose to fortune through the anti-trust woes of IBM and a second rate imitation of a competitors product. Hardly a post-boy for “free” market competition and original innovate. Warren Buffet is only a stock picker, not an entrepreneurial creator of businesses. Such fatuous examples are indicative of the quality of the argument being made. “Democracy” is a political concept, “capitalism” an economic one: conflating them is ideological mush. And industrial capitalism always tends toward the generation of oligopolistic concentrations due to the technical efficiency of large-scale production and high, uncertain long-run fixed capital costs. That also means that such oligopolies tend toward the securement of rents through market dominance, which will also extend to be secured through the exercise of political policy capture.
    These are simply facts of economic life, which are not to be wished away through huffing on about counter-factually idealized market competition. Indeed, it should have been obvious to any observant person in these last 30 years that “free market” ideology, exulting in the name of individual freedom, opportunity, innovation, and competition, has been deliberately promulgated and evangelized as a smoke screen for the rent-seeking activities of corporate oligopolies.

    1. K Ackermann

      Here is what Gates invented: a $65 operating system and GUI for the masses.

      Did IBM do it? no.
      Did Sun do it? no.

      Microsoft also had a great selection of development tools early in the game. They put no copy protection on their disks, and let the stuff grow feet. I’m not aware of a single end-user ever being brought to court for using their software for free.

      That was smart marketing.

  7. Yves Smith Post author

    john c.

    For once, that was no typo. Techies are fond of the coinage “automagically” and I find it useful

    1. donna

      from “any sufficiently advanced technology is indistinguishable from magic” — Arthur C.Clark

      via Wikipedia:

      Arthur C. Clarke formulated the following three “laws” of prediction:

      1. When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.
      2. The only way of discovering the limits of the possible is to venture a little way past them into the impossible.
      3. Any sufficiently advanced technology is indistinguishable from magic.

      then turned into “automagical” via Lawrence Peters:

      “automagical” via Wikipedia:

      # 1987, Lawrence J. Peters, Advanced Structured Analysis and Design, Prentice-Hall, ISBN 0130131377, page 2

      “Throughout this text we will emphasize the employment of a systems approach to the practice of analysis and design. In it we attempt to present this portion of the software lifecycle as a discipline rather than an “automagical” (automated magic) process.”

  8. Matt Stiles

    The concentration of power did not come from “deregulation.” It came from inflationism.

    If banks can essentially create money prior to acquiring deposits (see: Steve Keen – Roving Cavaliers of Credit) it should come as no surprise that the money they create goes primarily toward purchasing deposits from smaller institutions.

    Again, fractional reserve lending and perpetual inflationism are the root cause of business cycle extremes. If credit expansion is guaranteed by the state, any business that does not expand at a rate exceeding this credit expansion quickly gets eaten by those that do.

    All of the “capitalist greed”, ponzi schemes, bubbles and general melting of social values can be attributed to the primal requirement to keep up with credit expansion – or suffer the immediate financial consequences.

    Focusing on anything else is akin to focusing on symptoms of a disease rather than the disease itself.

  9. Graphite

    Big businesses started an organized campaign in the Carter adminsitration, arguing that regulation were interfering with their ability to innovate. The claim was utter rubbish.

    Airfares and airline & trucking routes used to be set or significantly controlled by diktats from government bureaucrats. Was it really “utter rubbish” to say this was probably holding back innovation? Could People Express have arisen in the 1970s before Ted Kennedy helped get airline deregulation passed?

  10. Yves Smith Post author


    The lobbying was far more broad based than your comment suggests. I am out of town and therefore do not have access to my reference materials, but the coalition included many large industrial concerns, and Carter was sympathetic (perhaps because the economy was performing so poorly and he wanted to Do Something).

    Airlines were keen to promote deregulation, not to encourage innovation (despite the argument to that effect) but because they naively thought they would in the end be more profitable.

  11. craazyman

    There a high dose of “Golden Age” nostalgia in the premise that American Democractic Capitalism is facing some sort of moral decline.

    The country is born with slave labor, indentured servants and child labor, sweatshops and meatpacking shops, union busting and labor riots, sharecropping and sausage factory bone grinding with eyeballs and hooves in the meat, “Shoddy” uniforms for Civil War soldiers, Jim Crow everywhere south of the North Pole. Blood and tears everywhere — unless of course you were a Fortunate Son of some seed of possibility of some midwest dream or some Horatio Alger who sold newspapers on the corner and found a mentor in some industrialist who touched him like an Angel. Not a script for the common man.

    There were a few decades after World War II, when the industrialized base of the world — German, England, Japan, Asia — had been bombed into rubble. And there were only American factories to make the detritus of day to day life. And confident Americans flush with victory and inspiration and dreams to make the things that turn imagination into reality. — A strange moment in history — that kind of power and possibility. And yes it was a slight utopia of sorts, when the Lord smiled on us for some reason.

    The banksters fraud and systemic government-supported looting of the taxpayer balances sheet is indeed repugnant, but it’s only an outward manifestation of the sins of the tribe, who themselves drank at the trough like pigs being fed. There’s a saying that a people gets the government it deserves, and that 20% of the people cause 80% of the problems. So 80% of the people get the government that 20% of the people deserve. The eternal fight from the beginning of forever.

    It’s always a fight. Always has been. Always will be. There was no time of the easy bright dream that wasn’t paid for by somebody else’s blood and bones. “All our lives we sweat and save / Working for a shallow grave / There must be something else you say / Every thing must be this way” as the poet says. Unless of course, visionaries and statesmen and philosophers make it all new and better with deep insights into human nature and deep regard for the tensions between community and individual. I am not sure how that is legislated, except by the poets, the true legislators of the world, in the form of their influence on the way Spirit sees itself and its relation to its Other.

    Capitalism after the crisis won’t be any different than capitalism before, a big mosh pit squirming with some murderers and some saints and most souls wondering how to survive and keep the two sides from going at it. While we all wait and see whether someone in Washington can figure out how to make rules that keep the body count down and the ant colony grinding out the food and drink with some degree of socially sustainable regementation.

    -Thus saith Magonia L. P. Desiree.

    1. DownSouth


      Superb comment!

      Zingale is certainly trying to keep the American myth alive.

      When I read his commentary I was reminded of something James Baldwin wrote in The Fire Next Time:

      The American Negro has the great advantage of having never believed that collection of myths to which white Americans cling: that their ancestors were all freedom-loving heroes, that they were born in the greatest country the world has ever seen, or that Americans are invincible in battle and wise in peace, that Americans have always dealt honorably with Mexicans and Indians and all other neighbors or inferiors, that American me are the world’s most direct and virile, that American women are pure.

      I just wonder: How many people inside the US still buy into this sort of cheap, self-serving paltering and chest thumping? I have been an expatriot for about 10 years now, and I know almost no one where I live buys into it. It’s understandable that the powers-that-be in the US want to keep it alive as long as possible, but at what point does reality overtake fantasy?

  12. Blissex

    «Again, fractional reserve lending and perpetual inflationism are the root cause of business cycle extremes.»

    Sure because when there was the gold standard etc. there was no business cycle :-).

  13. Namazu

    Let me get this straight. You reach across two centuries and two continents to find four examples of over-concentration of power not due to government (and one could argue about the role of the postal savings system in providing cheap capital to the Zaibatsu). Against this, we’ve seen–in the blink of an eye–the US government take over almost the entire mortgage market and provide blanket support to all the major banks, the remaining brokers, the insurance companies, our largest industrial company, the auto industry, and consumer finance arms thereof. Zingales’ main point is underscored by many observables, not least of which the robustness of the DC property market, and (I fear) a great deal of social unrest to come.

  14. BwO

    Bravo Namazu,

    The concentration of power we’re complaining about certainly begins more often with too much government, or too much government captured by “free entreprise”, than it does with the anarchy of too little. Big government — the most centralized power of all — is always so tempting because it can do so much good if correctly employed and the rules stay fair and free. Unfortunately, history mostly proves that the road to hell is paved with good intentions and that Big government is a Big lever for Big business that ends us costing us Big bucks.

  15. Yves Smith Post author


    I suggest you study the history of commerce in the US and abroad. ITT regularly conducted assassinations in Latin America. The railroads had what amounted to private armies. GM has an aggressive enforcer (out of town, but I can pull the references when I get back), effectively running a police operation.

    Concentration of power and use of force is hardly the exclusive province of the state.

  16. Skippy


    Shortly after the Battle of Matewan and the assassination of Sid Hatfield, coal miners from across West Virginia gathered in Charleston, West Virginia. Determined to organize the southern coalfields, they began a march to Logan County. Thousands of miners joined them along the way in what became the largest armed insurrection in the United States since the American Civil War, the Battle of Blair Mountain. This two year “Coal war” resulted in a reported 50 deaths-including the deaths of 3 members of the West Virginia State Police.[8]

    The Battle of Matewan and subsequent events later became the subject of the 1987 film Matewan and the play Terror of the Tug.

    In northern Minnesota where iron miners faced a parallel struggle in the 1920’s, a river was named the Matewan River in honor of the dead and as a reminder of the struggles faced by miners and the necessity for unions

    1892: Homestead Strike: Skip town and let the hired thugs sort it out.

    Wiki link: http://en.wikipedia.org/wiki/Matewan


    Andrew Carnegie Dictum
    A) To spend the first third of one’s life getting all the education one can.

    B) To spend the next third making all the money one can.

    C) To spend the last third giving it all away for worthwhile causes.

    On 6 July, the arrival of a force of 300 Pinkerton agents from New York City and Chicago resulted in a fight in which 10 men—seven strikers and three Pinkertons—were killed and hundreds were injured. Pennsylvania Governor Robert Pattison ordered two brigades of state militia to the strike site. Then, allegedly in response to the fight between the striking workers and the Pinkertons, anarchist Alexander Berkman shot at Frick in an attempted assassination, wounding Frick.

    While not directly connected to the strike, Berkman was tied in for the assassination attempt. According to Berkman, “…with the elimination of Frick, responsibility for Homestead conditions would rest with Carnegie.” Afterwards, the company successfully resumed operations with non-union immigrant employees in place of the Homestead plant workers, and Carnegie returned to the United States. However, Carnegie’s reputation was permanently damaged by the Homestead events.

    wiki link: http://en.wikipedia.org/wiki/Carnagie_Andrew#1892:_Homestead_Strike


    Xe Services LLC (pronounced /ˈzi/) is a private military company founded as Blackwater USA in 1997 by Erik Prince and Al Clark.

    Xe is currently the largest of the U.S. State Department’s three private security contractors. Of the 987 contractors Xe provides, 744 are U.S. citizens. At least 90 percent of the company’s revenue comes from government contracts, of which two-thirds are no-bid contracts.

    A book on Blackwater by Jeremy Scahill, claims that the leadership of Blackwater was driven by a Christian agenda deployed by, ‘extreme religious zealots’. Scahill suggests that its COO, former Pentagon Inspector General Joseph Schmitz, is a vociferous preacher on behalf of a crusading ideology, his recurrent theme being ‘the rule of law under God.’ America’s role in the world is to bring God’s law to all humanity, in what Scahill terms a vision of ‘Christian Supremacy’

    Wili link: http://en.wikipedia.org/wiki/Blackwater_USA#Christian_Right_Ideology

    Skippy…Yves some have not seen the real world and the actions power is prepared to go. I could have been one too, got the offer a couple of times.

  17. Skippy

    United States Training Center (USTC, formerly Blackwater Training Center) offers tactics and weapons training to military, government, and law enforcement agencies. USTC also offers several open-enrollment courses periodically throughout the year, from hand to hand combat (executive course) to precision rifle marksmanship. They also offer courses in tactical and off road driving.[37]

    USTC’s primary training facility, located on 7,000 acres (28 km2) in northeastern North Carolina, comprises several ranges, indoor, outdoor, urban reproductions, a man-made lake, and a driving track in Camden and Currituck counties. Company literature says that it is the largest training facility in the country. In November 2006 Blackwater USA announced it acquired an 80-acre (30 ha) facility 150 miles (240 km) west of Chicago, in Mount Carroll, Illinois to be called Blackwater North. That facility has been operational since April 2007 and serves law enforcement agencies throughout the Midwest.

    The Raven Development Group is a construction management and management subsidiary. It was established in 1999 to design and build Blackwater Worldwide’s training facility in North Carolina.

    A private security service, Greystone is registered in Barbados, and employs third country nationals for offshore security work through its affiliate Satelles Solutions, Inc.[70] Their web site advertises their ability to provide “personnel from the best militaries throughout the world” for worldwide deployment. Tasks can be from very small scale up major operations to “facilitate large scale stability operations requiring large numbers of people to assist in securing a region”. [70]

    Greystone had planned to open a training facility on the grounds of the Subic Bay U.S. Naval Base, but those plans were later abandoned.

    Links between Blackwater and the Order of Malta have come under scrutiny. The Chief Operating Officer of the Prince Group, Joseph Schmitz, is an honorary member of the group the Knights of the Sovereign Military Order of Malta, considered to be the main successor to the crusader Knights Hospitaller, a Catholic military order, and now a voluntary disaster relief, aid and medical organization. Although the Order does not rule Malta, its name and historic origins as an eleventh century crusader order has caused critics posit that Blackwater is itself a religious crusader organization, or is secretly run by the Knights of Malta.

    In early August 2009, sworn affidavits lodged at a Virginia court in the USA contained various allegations including murder, weapons smuggling, and the deliberate slaughter of civilians against Blackwater, with claims that founder Erik Prince had organised the murder of former employees co-operating with US federal investigators.[104] In one of the affidavits a former employee who served for 4 years in Blackwater and was a former US marine, alleged that Mr Prince;

    “views himself as a Christian crusader tasked with eliminating Muslims and the Islamic faith from the globe…To that end, Mr. Prince intentionally deployed to Iraq certain men who shared his vision of Christian supremacy, knowing and wanting these men to take every available opportunity to murder Iraqis. Many of these men used call signs based on the Knights of the Templar, the warriors who fought the Crusades”.

    It was also claimed that Mr Prince and other executives destroyed incriminating videos, e-mails and documents to prevent the US State Department obtaining them.[105] In a statement to CNN, the company said

    “It is obvious that plaintiffs have chosen to slander Mr Prince rather than raise legal arguments or actual facts that will be considered by a court of law. We are happy to engage them there.“We question the judgment of anyone who relies upon and [reiterates] anonymous declarations.”[104]

    A book on Blackwater by Jeremy Scahill, claims that the leadership of Blackwater was driven by a Christian agenda deployed by, ‘extreme religious zealots’[106]. Scahill suggests that its COO, former Pentagon Inspector General Joseph Schmitz, is a vociferous preacher on behalf of a crusading ideology, his recurrent theme being ‘the rule of law under God.’ America’s role in the world is to bring God’s law to all humanity, in what Scahill terms a vision of ‘Christian Supremacy’.[106]

    In Scahill’s account, Erik Prince, Blackwater’s founder and chairman, with his connections to right-wing Catholic groups, believes that Blackwater is an important vehicle for ensuring the central role of Christianity in US foreign policy. However, according to Newsweek Prince plays down any connection between his religion and his business.

  18. Swedish Lex

    So, Europe-bashing is back on the menu (if it ever was off):

    “the United States today risks moving in the direction of European corporatism and the crony capitalism of more statist regimes.”

    It is of course true that Europe suffers from, in some cases, excessive corporatism and crony capitalism. I would add serious political corruption to that too (viva Italia). However, I would submit that the U.S. Empire out-cronies and out-corrupts the old continent in almost every regard. The corruption of Rome before the downfall has a serious historic competitor in the two Bush administrations.

  19. valuemonitor

    I think you are mistaken about past estate tax rates in the US, at least if you were thinking only about federal taxes. On the federal level I don’t think they’ve ever been higher than 55%, though in recent years many states have added their own estate taxes, so combined rates have pushed towards 70%. The asset price inflation of the past three decades has, along with actual inflation, pushed many estates into the taxable category.

    George Bush’s reforms which sharply raised the exempted amount have reversed this trend to a great extent. However, the rate decline from 55% to 45% was not effectively much of a decrease, because I think they also dropped the deduction of state estate taxes. Likewise, Bush’s plan to eliminate the estate tax entirely is not as generous as it seems, because he also eliminates the basis step up. In other words, capital gains taxes would still ultimately be paid, which they aren’t now because the decedent’s basis is increased to date of death (or 9 mos later at the choice of the executor).

    The big change in estate taxation occurred in 1976, when we adopted the Unified Gift and Estate Tax Credit. Bush deviated from this regime when he raised the estate tax credit (we talk about it like its an exemption, but it is actually a credit) but didn’t do the same for the gift tax. I believe that 1976 marks the date that the sorts of trusts that old wealthy families used to completely avoid estate taxes were eliminated. This allowed the simple changing of beneficiaries with no estate tax consequences when a beneficiary died. So the old money has a different and remarkably more generous tax standard to follow than the new money, and will for another thirty five or forty years. (Trusts cannot be perpetual in most states).

    When you read about trusts today, it’s a completely different animal, with fewer advantages than pre-1976. Generation skipping trusts such as are available now have their own severe taxes. The logic of paying these requires believing that we’re going to see continued inflation and asset inflation.

    I encourage more informed readers to correct any mistakes I’ve made above. It is a complicated field.

  20. BwO


    I absolutely agree with you that, “concentration of power and use of force is hardly the exclusive province of the state”.

    At the same time, I think that the state is often the mechanism by which private concentration of power gets ahead of the competition. We typically think of the state as redistributive in the direction of equality, whereas I think business is very apt at using it in the other direction. The financial crisis is a very good example of this.

    I overstated the case, and I apologize for aliteratively goofing off in your comment section, but I really do think a history of commerce actually shows pretty clearly that one of the best ways to cement a long term competitive advantage is to use the state as a lever, as Thomas Frank pointed out a while back for the railroads:

    “The Commission . . . is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, at the same time that that supervision is almost entirely nominal. Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things. . . . The part of wisdom is not to destroy the Commission, but to utilize it.”

    Private armies are expensive and useless, at least if you can get the public to pay for them and call the soldiers ‘regulators’.

    Foe even more history, check out Braudel’s work which goes in the same direction for 15th-18th century capitalism.

    Competing to capture the state is a business model that has been around for a long time. It’s ROI eventually overwhelms and attempt to construct a private army.

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