Eschenbach: The Root Cause of the Economic Crisis: Selfishness Was In, Selflessness Was Out


The Death of Voodoo Economics
By Sid Eschenbach / The Rag Blog / March 12, 2009

While it’s interesting, almost unavoidable and improbably instructive to play a ‘blame game’ regarding who is responsible for our collective demise, my own view is that finding answers to more fundamental cultural questions regarding the WHAT and the WHY of how we got here is far more important to understand than the WHO.

In other words, what belief or ideology made so many people do the things that they did that led inexorably to our present situation? While in a parlor game we might ask who was the worst dictator; Mao, Hitler, Lenin, Stalin, or Pol Pot, the more interesting and by far the more illustrative question is why did they do what they did? What was the ideology that drove them and all those around them to commit the acts they committed? What was the culture they lived within that fostered their creation and facilitated their acts.

Beyond that, beyond the questions of what and why, there is a second component to our disaster, the HOW, and that too demands examination. What were the actual economic mechanisms of our downfall? How are they related to the ‘what’ and ‘why’, and are they also culpable or are they simply innocent tools that were misused by ideologically misguided people?

What and Why

When the mavens of conventional wisdom say things like; “There’s plenty of blame to go around”, what they are really saying is that the culture itself has failed in some fundamental way. They mean that there has been not an individual but rather an ideological failure within the culture, a collective mistake in the value system used to regulate society. Strangely, one of the leaders of the very ideology that lead so many to err was himself the first to clearly and publicly identify the problem: Alan Greenspan, in response to a question from Rep. Henry Waxman during his Congressional Testimony in October of 2008, said the following:

Well, remember that what an ideology is. It is a conceptual framework [that determines] the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.

Greenspan, more a sociologist than economist in that statement, speaks a fundamental truth; that he (and by logical extension all of the then current ruling political and economic class) shared an ideology that ‘had a flaw’. In that light, they are blameless as individuals but indictable as an ideological group… and how each contributed in greater or lesser part to the events that followed is of far lesser importance than our understanding the ‘flaws’ in the ideology that led them to their acts.

So what were the values of that flawed ideology? What were the beliefs shared by these many perfectly rational and responsible individuals that collectively led their society into economic chaos? Again, Greenspan, as arguably its foremost practitioner, identifies the ideological cornerstone, the belief that the free market system is the best way to allocate capital and risk in an economic system. This is the economic ideology popularized by the writings of Ayn Rand, given intellectual and academic substance by Milton Freidman, and delivered to the western mainstream of economics by Ronald Reagan. It is known by many monikers; supply-side economics, Chicago School economics, neoliberal economics, trickle-down economics, and free-market economics… but by whatever name, it is the same ideology identified by different parts of its message.

Beyond the general argument of its proponents that it is the best economic system because of it’s supposed superiority (over the state) in the allocation of capital and evaluation and distribution of risk, it is also based upon two other fundamental ideas; first, the idea that greed and self-interest are the most significant motivators in human behavior, and second, it advances the idea that ‘market efficiencies’ (such as production costs or sales prices) are the most important elements of market capitalism, and considers anything that inhibits market efficiency or self-interest as a hindrance to general prosperity and detrimental to the society as a whole.

In brief, it is an ideology born in reaction to the state controlled societies of the mid-20th century and shaped as a rejection of the socialist and communist propositions regarding the management of society. Like all grand ideologies, there is more than a kernel of truth at its core. However, and again like all other ideologies, it is ultimately less a replicable and universal system that will produce the same results in different countries and cultures than it is a reflection of the values of the individuals that practice it.

In order to demonstrate what I mean by that, an example: imagine a half-dozen different countries all have exactly the same vehicular transit policies. Identical laws, penalties, procedures and processes governing how automotive traffic is managed. Now imagine that those countries are Nigeria, Italy, Norway, Japan, Argentina and Canada, and ask yourself if you think that if one visited those countries with identical traffic laws, would you expect all the drivers of these countries to drive in the same way? If you’ve ever been to any of these countries, your answer would of course be ‘no’… and therein lies the ‘flaw’ found by the leader of the free-market ideology; the different way individual members of every culture respond to identical rules. The ‘flaw’ that Mr. Greenspan found within his ideology, the lack of individual responsibility, was in fact the result of the change in cultural values caused by the very free-market philosophy he believed in.

Mr. Greenspan was born and raised in the even then vanishing cultural values that were described by Max Weber in his classic work “The Protestant Ethic and the Spirit of Capitalism”, a culture where an individuals righteous and proper behavior, moderated and guaranteed by his church, served as the cornerstone of individual responsibility found at the heart of early American capitalism. Weber’s book describes in detail the particularly American expression of one of the key and indispensible ingredients of all successful societies; the individual responsibility of the citizen that is also understood to include a collective responsibility… the willingness to sacrifice oneself for the greater good. Indeed, if there is a single quality that predicated American greatness on the world stage in the 19th and 20th centuries, it was that combination of individual strength and collective responsibility… the ideology that ‘I must be a strong and good individual’ combined with ‘I am my brothers keeper’. From the pre-Christian Romans to the 21st century Chinese, the requirement that individual members of society subordinate their needs to the greater good while simultaneously leading honorable lives as individuals has been the narrative of all successful human civilizations… and the American is no exception.

What shocked Mr. Greenspan, then, was his discovery that this was essentially no longer true; that individuals across the social spectrum… from the financial and political leaders of the modern American society to the individual citizen consumers and workers… that they all placed their own needs above the common need, their own benefit above the common benefit. While this is certainly nothing new in human history, it was new indeed to the American popular culture. While greed and self-aggrandizement are never far below the surface of inherent and biologic human behavior, when those qualities are celebrated and emphasized, as they are in the Ayn Rand neoliberal socio-economic model, there could be no other outcome. Just as in her novel “Atlas Shrugged” when the ‘productive and creative’ people went on strike, abandoning the needs of the larger society to pursue their own personal benefit, in the real life of our own historical novel we reached a condition wherein all things selfish were deemed virtuous… and here we have finally identified the ‘flaw’ discovered by Greenspan.

Bankers, he was shocked to discover, had put their own well-being above their company’s welfare… but worse… we had all become, each in our individual parts, like the bankers. We bought what we could not afford… thinking only of ourselves, we borrowed what we couldn’t repay, never thinking of the consequences… and at the fall, we all pointed fingers at one another, never considering our responsibilities to the society as a whole… but why should we? Hadn’t our political class been preaching the virtues of selfishness and greed for nearly three decades, for over a full generation? Hadn’t anyone who tried to design and build systems that worked for the collective well-being, from community organizers to union leaders, been attacked and discredited as liberal dreamers? That kind of ‘socialist’ thinking had become, in the modern vernacular, foolish and dated. Selfishness was in, selflessness was out.

However, one can only look to other successful societies to compare behaviors and see the values of Reaganism reflected in something very different: in Japan, heads of failed companies took personal responsibility and resigned in public disgrace; in America, heads of failed companies gave themselves golden parachutes and lashed out at all around them as the cause of their company’s demise. In Europe, employment, public health and financial equality held center stage, while in America all three were held up as ‘yesterdays’ thinking, and instead efficiency, free choice and the right to riches were celebrated as both the goals of policy, and became policy itself. In retrospect, what is shocking about Alan Greenspan’s comments is that after 30 years of worshiping the masters of the universe, he is shocked at their and our collectively selfish behavior… but in his defense, his own culture is another than the one being lived around him. Simply put, his mistake was to assume that his own personal values were the values of the present, and not recognizing that they were those of the past.

Under this ideologic regime, and particularly in the United States, we have seen national tax, trade and labor policies manipulated by the rich to make themselves richer at the expense of the rest of society. Since 1980 and the formal entry of neoliberal economics onto the American scene under Ronald Reagan, the top 1% of Americans today earn nearly 4 times the amount they earned in 1980, while the incomes of all others have remained essentially flat. In contrast, during the period from 1940 -1970, all incomes of all sectors of American societies doubled. While particularly true for the U.S., it is also true for the world has a whole. A recent (Oct 2008) OECD study shows that the United States is higher than only two countries out of thirty member states (Turkey and Mexico) in measurements of poverty and inequality. The same report states that the top 10% of Americans control 71% of the national wealth. In short, under the neoliberal free-trade banner, inequality has increased within nearly all countries and also between all countries… and this is not a trend that can continue with creating major intra and international problems, and can only be considered a gross failure of the policies designed by an ideology based upon greed.

How

This recent ideologically founded catastrophic failure of the entire economic framework… from manufacturing to consuming to financing… is in many ways testimony to the ‘success’ of the same… or as Bob Dylan said many years ago, ‘she knows there’s no success like failure, and that failure’s no success at all.’ The ability to produce more goods more cheaply and distribute them more broadly should be a good thing, and the past 30 years represent the first time in history that man could actually, through a combination of high tech, mass transport, low wages and high debt, satisfy virtually every need of every person to and beyond the limits of their economic abilities to consume. In order to do that, massive manufacturing, consumer and financial businesses were created that followed the same laissez faire ideological principals, principal among them being that size matters due to the following fundamental narrative; better is more efficient, bigger creates greater efficiencies, therefore bigger is better. While there is always risk in business to uncontrolled growth, the countless mergers and acquisitions in automotive, high tech, finance, biotech, agribusiness, construction and energy companies for the last part of the previous century was the rule, not the exception.

The idea that there could be existential disadvantages or threats to great size was never seriously considered in this paradigm, and any concept that a manufacturing, services, consumer or financial company could be too big simply didn’t enter into the ideological model. On the contrary, continued consolidation of all industries was looked upon as the essence of the march to efficiencies under the laissez faire flag. As a result, when the black swan entered, the event that had never happened before but, because the future has never happened before, did, the exploding of a ten-year housing bubble exploding, the results were equally as all encompassing and destructive in the same way that the successes of the earlier years had been all-encompassing… on a global scale and with massive companies… and again all due to the same reason, that being following blindly the commonly accepted dogmas of the reigning ideology.

Over a period of 30 years, a massive global manufacturing capacity was built upon one simple mantra at the heart of ‘free trade’: manufacture in the poor countries and sell in the rich countries. This, of course, requires an ideological component that will solve the political problems that have historically arisen… a way to convince the people in the rich countries not to place tariffs upon the importation of goods manufactured in the poor countries back into the rich countries. This was also achieved through liberal applications of the free-trade ideology, as selfish consumers were essentially ‘bought off’ by the cheap goods and easy credit provided by the market leaders. They bought the ultimately destructive argument that the availability of cheap goods was a legitimate and valid long term policy goal, instead of the creation and maintenance of industrial jobs and the maintenance of a diversified economic culture. Occasionally, politicians would try to challenge the mantra, most notably Ross Perot in the 1992 American presidential race… but none was able to puncture the bubble of consumer and voter credibility.

With that socio-political problem solved, internet based computer technologies solved the communication and management problems that had previously constrained growth, and there were suddenly no practical limits to the size nor the locations of the multinationals. They could manufacture virtually anywhere, ship virtually anywhere, and sell virtually anywhere, and be headquartered virtually anywhere… all managed by computers that organized, rationalized and made possible the most theoretically ‘efficient’ allocation of capital and the assessment of risk possible ever seen.

However, the laws of the business cycle cannot be repealed through ideology, and something had to give. As stated above, the modern free market trade and development paradigm requires two components; poor manufacturing countries and rich market countries. As poverty is far more abundant than capital, it is the latter which gave way first. The bursting of the real estate bubble in the United States marked the outer limits to what had been for two decades an apparently endless supply of consumer capital, the fuel that powered the machine. To make matters far worse, this end of consumer credit combined itself with a product glut (caused by the achievement of primary market saturation of nearly all goods), and a crash could not be stayed. Not only did consumers no longer have money… they really didn’t need to consume anything new because they had at least one of everything. Therefore, when the limit of no more ability to create money through debt coincided with fully penetrated markets for nearly all consumer goods, the edge of the cliff was defined.

This nearly instantaneous stop to spending in the principal market country resulted in massive manufacturing overcapacity in everything from cars to refrigerators to stereos to computers around the globe… leading to severe contractions in those economies too. It is, however, the financial sectors of the rich countries that have turned out to be the biggest casualties of the meltdown, and the reason for that has less to do with what could be described as the relatively normal contraction at the end of a business cycle than with the size and importance of the companies affected creating an actual existential threat to the countries involved. This too is the product of the ideology of free-market capitalism, because instead of regulating, overseeing and managing the ‘masters of the universe’, the countries whose leadership drank too much of the ‘bigger is better’ ‘no regulations are better than regulations’ ‘let the free market allocate capital and measure risk’ Kool-Aid are the countries that have been hit the hardest, a phenomena clearly demonstrated by comparing the relative health of the financial sectors of Canada to the United States.

Canada, long the butt of jokes for its ‘provincial conservatism’ and ‘stodgy capitalism’, now stands as virtually the only truly healthy financial system in the west. Because neither the national government regulators nor the executives of the financial institutions ever drank the ideological Kool Aid that has destroyed the rest of the financial universe… because they required borrowers to show how they could pay back the loans… because they never lost sight of either individual nor corporate responsibility… in short, because they behaved the way Alan Greenspan mistakenly assumed their brethren to the south would behave, their financial system is today the soundest in the western world… and there is no greater evidence of the culpability and the failure of the free trade, laissez faire, trickle down, Chicago School, neo-liberal, supply-side, Ayn Rand school of economics. They simply didn’t permit their banking and financial entities to participate in the orgy of irresponsible creation of money and ‘growth’ that other countries did… and those countries, from the United States to Iceland, Latvia to Ireland, are now paying the price for their intoxication with existential hang-overs.

How Now

What is the solution? What new belief system will replace the old; what ideology new or old will, as Greenspan said, be more ‘accurate’? Beyond that, how will this new cultural narrative steer the collective actions of a culture to success and stability, just as the Reaganite meme steered us to failure?

My views are that the fundamental mistake of the ‘laissez faire‘ brand of capitalism was, to return to Dylan… its very ‘success’… if indeed in the face of such widespread devastation the meaning of the term in a limited sense can be understood. The neoliberal ideology is a system that neither accepted limits to its power nor recognized other virtues than those (supposedly) valued by the market; low production costs and high market prices, low taxes, no tariffs, the nationalization of loss and the privatization of gain, no limits on growth, the destruction of organized labor, etc.

However, as we have all discovered, the following problems are part and parcel of that paradigm: low manufacturing costs lead, in their ultimate expressions, to child labor, sweat shops and a race to the bottom through union busting, country shopping and low environmental regulations; low taxes facilitate as their principal effect a marked and rapid increase in inequality, not the creation of new wealth as the Ayn Rand school advertises; high market prices demand a large wealthy middle class able to pay them… but there is no provision within the paradigm to protect these very markets; the ‘efficiencies’ of scale created by huge corporate monoliths moves us into the ‘too big to fail’ category, guaranteeing the nationalization of failure while preserving the privatization of gain. In short, we adopted an ideology that subordinates nearly all ‘human’ or ‘liberal’ values to a ruthless ‘efficiency of the market’ model… and are now harvesting the inevitable results of the mature expression of that belief.

With that in mind, the tenets of a new socio-political economic meme should be clear:

  • That no private entity be allowed to become too big to fail, whatever that means within the context of the industry and region.
  • That providers of essential public services once more return to public management as public utilities, as monopoly powers over essential services is something that is too dangerous to be left in private hands.
  • That the neoliberal god of ‘efficiency’ must be replaced by the god of ‘wellbeing’, and that society should not assume that the latter is a product of the former.
  • That the fundamental difference between the concepts of an ‘individuals responsibility for their own life’ and crass selfishness be clear, and the latter be understood to be the anti-social and destructive behavior that it is.
  • That nations reclaim their rightful control over their national economies and act in the long-term interests of their citizens wellbeing. That would include the right to protect their national markets and their national industries, among other things.
  • That while understanding that all men are not created equal and that the natural processes of any system will always be to generate both winners and losers, the goal of every nation should be to promote tax policies that trend towards equality of opportunity, equality in growth, and shared obligations to the nation… not towards greater inequality, the creation of fixed economic classes and unequal individual opportunity.

We are now paying the price for having worshiped at the feet of false gods, as the efficient market theories of neoliberalism have led us to ruin through the hubris of its practitioners. What was surprising to Alan Greenspan, that humans, especially when encouraged by the reigning ideological narrative, could be senseless, selfish and heartless, should surprise no one. Hopefully, however, out of the ruins of this disaster will arise a new ideology that encompasses some of the above social, political and economic values, and economic Randism, Friedmanism and Reaganism and will take it’s just place alongside the other ideological failures … in that place that Reagan himself called the “dustbin of history”.

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