America’s Libertarian Pendulum

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I wrote a piece for Guernica on the regular reappearance of libertarianism in America. Here’s the key idea I wanted to get across:

These tensions [between majoritarian politics and unassailable individual freedoms] are largely inherent to our political system, and as long as we have a liberal democracy, they cannot be finally resolved. Libertarian arguments will keep coming back, because majoritarian politics will always be unsatisfying or objectionable to some subset of the population. Transforming a policy dispute into constitutional or higher order debate about individual rights provides a mechanism for resisting majoritarian abuse, but it can also undermine the potential power of a political majority and make a country ungovernable. And as we are now seeing, this ability to reframe politics as a battle between the individual and the state also contains the explosive potential to escalate simple politics into a constitutional crisis. Billionaire funders and government ineptness aside, libertarianism is in the air because the line between private power and public accountability is being redrawn.

A Good Man

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A friend and I were talking about Bertolt Brecht the other night, and he mentioned a poem I’d never read, “The Interrogation of the Good,” which Slavov Zizek quotes in Violence to mock the neoliberalism of American progressives and professionals. Brecht’s poem goes far beyond Hannah Arendt in blaming the average person who thinks he’s apolitical, ‘just doing his job,’ for enabling political and societal breakdowns through complacence. I can’t help from thinking that the poem is something of a joke, but there’s also an unmistakable hint at the absolute hatred that people bear against one another when things fall apart. It has to be one of the most scathing condemnations of political apathy and shallow philanthropic liberalism ever written.

“The Interrogation of the Good”

Step forward: we hear
That you are a good man.

You cannot be bought, but the lightning
Which strikes the house, also
Cannot be bought.
You hold to what you said.
But what did you say?
You are honest, you say your opinion.
Which opinion?
You are brave.
Against whom?
You are wise.
For whom?
You do not consider your personal advantages.
Whose advantages do you consider then?
You are a good friend.
Are you also a good friend of the good people?

Hear us then: we know.
You are our enemy. This is why we shall
Now put you in front of a wall. But in consideration
of your merits and good qualities
We shall put you in front of a good wall and shoot you
With a good bullet from a good gun and bury you
With a good shovel in the good earth.

Reimagining the Corporate Form: Toward a More Democratic System of Corporate Governance

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This entry was also posted at the HLPR Blog: Notice & Comment.

Occupy Wall Street has, in the words of John Paul Rollert, “come to embody a common sense that something is wrong with American capitalism.” The problem Rollert points to is not with capitalism itself, but with a particular American version that has ceased to work for broad cross-sections of its population. Given America’s Depression-level income inequality and near-record levels of private indebtedness, it is extremely tempting to focus on bad outcomes as the problem. But the real issue is that many of the economic and political structures that we take for granted repeatedly produce unequal, undesirable outcomes. If reformers seek to make American capitalism more inclusive, the focus needs to be on fixing these structures and getting the rules right.

It has been a steady mantra of Occupy Wall Street not to make demands of existing political leaders and institutions. But as Matt Langer explained, “the reasoning behind not making demands most certainly does not preclude making demands of our collective imagination.” Whether people prefer to work within existing structures or not, the next essential step is to understand how broken institutions and flawed incentives created this mess and to start imagining what structures can be built in their place. Where better to start than with corporations?

Current Governance Structures and Their Shortcomings

Consider the role that our system of corporate governance has played in producing some of our current imbalances. Excessive risk-taking, stagnating wages, and the spike in executive compensation can all be linked back to a system of corporate governance that privileges management’s interests at the expense of other actors.

It’s by no means an original observation to say that boards are under the sway of management. Indeed, the US is something of a global outlier in allowing a business’ president/CEO to appoint its board of directors, and in some cases the president/CEO actually serves dually as the chair of the board. Not only is the composition of the board not reflective of its owners, employees, or investors, boards are only subjected to a relatively relaxed legal standard. As a result, directors often find that their interests (i.e. staying on the board) are best served by taking a passive role and letting management make most of the choices. In light of this structural failure to limit conflicts-of-interest, it should be unsurprising then that the interests of employees, shareholders, and other stakeholders are, at best, secondary to those of executives. As Harvard Law Professor Mark Roe succinctly phrased it, “the US is managerialist, not capitalist.”

Current governance arrangements have had an enormous impact on the larger economy and on the distributive features of American capitalism. To begin with, the existing corporate governance system (in conjunction with other regulatory failings) has proven inadequate to keep excessive managerial risk-taking under control. Despite the Enron disaster, the fall of Bear Sterns and Lehman Brothers, and the near-collapse of many of America’s overleveraged financial firms in 2008, we appear to have done nothing to address this issue. These risk-induced failures were repeated last week in the near-overnight fall of MF Global. As though nothing was learned, the star-studded MF Global board sat by and, in Steven Davidoff’s words, “gave executives []free rein to take tremendously risky bets that brought the house down.”

In 2008, Martin Lipton and his colleagues at Wachtell prepared an excellent memoranda on boards’ responsibility over risk-management which was posted at the HLS Forum on Corporate Governance. In discussing the legal framework for risk-management, they advised corporate boards to go beyond the minimal requirements created by the leading state law case, In re Caremark. Nonetheless, this is how they summarized the state of the law: “These cases demonstrate that it is difficult to show a breach of fiduciary duty for failure to exercise oversight; these cases do not require the board to undertake extraordinary efforts to uncover non-compliance within the company.” Federal laws like the Sarbanes Oxley Act do require auditing and increased oversight from the board, but the overall implications remain: the decision-making center of gravity remains largely with executives, whose personal incentives to post short-term profits can fuel excessive risk-taking, and current law gives boards few incentives to keep that risk-taking in check.

The problem is not just that boards are passive and deferential, but that those who want risk limited cannot make themselves heard. These high-risk strategies often run counter to the interests of other stakeholders, including bondholders and shareholders, whose interests are not reflected in the board’s composition and thus are not sufficiently represented. The idea that the broader public or the employees whose jobs are on the line would have a say is, under current thinking, not even a remote possibility.

The resultant proximity between Boards and management has a lot to do with runaway executive pay. Board members usually have a stake in their position, and because they are appointed by management, it’s often not in a director’s interest to start ruffling the CEO’s feathers. As Lucian Bebchuk and Jesse Fried argue in their excellent book Pay Without Performance, “structural flaws in corporate governance have produced widespread distortions in executive pay.” Their argument, briefly, is that boards have too many incentives to go along with management and are therefore unable to contract with executives at arm’s length. This broken feedback loop is at the root of the ridiculous pay packages, bonuses, and golden parachutes we’ve seen over the past decade.

The wage stagnation that’s affected the remainder of the workforce shares a common origin: all stakeholders other than executives are systematically excluded from decisions that determine compensation. The fact that corporate profits remain at near record highs suggests that the problem is indeed structural and not attributable simply to changes in the labor market. The absence of a voice for employees either in management or on the board of directors, in conjunction with weakening collective bargaining rights, means that the record profits businesses have been posting get funneled mostly to executives and do not translate into gains for the average American worker. The rules that determine who gets to cut the pie, in other words, have a lot to do with the fact that CEOs went from making 24 times what the average worker did in 1965 to making 185 times as much in 2009.

http://www.stanford.edu/group/scspi/cgi-bin/fact2.php

Ratio of CEO compensation to of average worker’s compensation.
Source: Economic Policy Institute, 2011, via SCSPI.

More Inclusive Alternatives to Minority-Rule Governance

Corporations do not have to be organized in this way in order for the private sector to prosper or for the economy to grow. Recent events should make it clear that keeping down transaction costs is not the only concern here. A number of compelling alternatives exist. I start with the more moderate reform proposals and conclude by proposing that we look to the German corporate model or other structures that afford investors and employees a role in a company’s management.

Calls are frequently made to enhance the role of shareholders in decisions involving executive compensation and risk-management that happen at shareholders’ expense. Bebchuk and Fried have argued that it’s possible to improve transparency and accountability by giving shareholders a greater say on pay, by strengthening shareholders’ ability to unseat and replace directors, or by increasing the number of independent directors (i.e. directors not employed by or doing business with the company). Another proposal they describe would allow shareholders the ability to amend the corporation’s charter. Any long-term solution to these agency problems entails providing investors and owners with a permanent vote or some structural role in decisions that affect them.

An increased role for employees is also necessary to prevent some of imbalances that have arisen between management and the average member of the workforce. Randall Thomas and Kendell Martin, for example, have argued that labor unions and related entities should be allowed to make shareholder proposals. It would be possible to go even further by affording both investors and labor a role on the board and a larger say in major decisions that affect a company’s future. This is precisely what the German corporate governance system does. The German Codetermination (Mitbestimmung) system provides employees a role in the company’s management and has proven remarkably successful across a number of economic sectors. And although German income inequality has grown in recent years, “income inequality in Germany is a long way from reaching US proportions.”

I point these out not to advocate any particular corporate form, but to observe that there are alternatives that can address failings of the existing system. It’s important also to observe that things were not always this way. The internet has fostered an explosion in new forms of social organization, and cooperative membership structures are another potential source of ideas. There’s no reason that running a successful business means accepting a one-size-fits-all corporate model, particularly when that model marginalizes a company’s most committed participants—its investors and its employees.

Capitalism isn’t a single thing or a system of natural laws. It is a system whose rules are shaped by political—and ideally democratic—choices. Nowhere is this more obvious than in the reified legal fiction of the modern corporation. The absence of democracy within corporations is a central reason that the US has seen such a proliferation of high-risk investment strategies, and an unprecedented divergence in incomes. The concerns of both investors and employees have been systematically subordinated to the interests of America’s managerial class. The failure to create an inclusive economy is fundamentally a failure to build inclusive institutions. And the first step to fixing this problem is remembering that the rules that govern institutional decisions can be different.

Regarding Anthropocentrism

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I read today almost two pages
In a book by a mystic poet
And laughed like one who has cried a lot.

Mystic poets are sick philosophers,
And philosophers are madmen.

Because mystic poets say that flowers feel
And say that stones have a soul
And that rivers have ecstasies in moonlight.

But flowers, if they felt at all, wouldn’t be flowers,
They’d be people;
And if stones had souls, they’d be living things, not stones;
And if rivers had ecstasies in moonlight,
They’d be sick men.

It would take not to know what flowers and stones and rivers are
To talk about their feelings.
To talk about the soul of flowers, stones, and rivers
Is to talk about oneself and one’s own false thoughts.

Thank god that stones are only stones,
And that rivers are nothing but rivers
And that flowers are just flowers.

As for myself, I write the prose of my verses
And I am satisfied.
Because I know that I understand Nature from the outside;
And I don’t understand it from the inside
Because Nature has no inside;
Otherwise it wouldn’t be Nature.

- Alberto Caeiro (Fernando Pessoa)
Poem XXVII from The Keeper of Sheep, translated by Patricia Ferrari

Economist, Heal Thine Incentives

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In case it wasn’t clear, this is why businesses choose to pour money into economics research:

Political economy, so to speak, hits the employers [i.e. funders] of the professors where they live. It deals, not with ideas that affect those employers only occasionally or only indirectly or only as ideas, but with ideas that have an imminent and continuous influence upon their personal welfare and security, and that affect profoundly the very foundations of that social and economic structure upon which their whole existence is based. It is, in brief, the science of the ways and means whereby they have come to such estate, and maintain themselves in such estate, that they are able to hire and boss professors.

 – H.L. Mencken, from his essay, ”The Dismal Science” (which I found via Doug Henwood’s excellent and prescient book, Wall Street)

That is precisely the same problem the economics profession is dealing with almost a full ninety years after Mencken wrote this essay. As Edward Nell, an economics professor at the New School told Reuters, ”Nobody can say that the donors, corporations, people that fund the studies are doing anything except funding a mathematical approach but it completely changed the perspective of the economics profession.” The 2010 movie, Inside Job, named the conflict of interest facing academic economists as a central factor in the lead-up to the 2008 financial crisis. And there’s no shortage of commentators, from both inside and outside the profession, arguing that this conflict of interest either facilitated the 2008 financial crisis or, at best, created blind spots that made made it difficult to see the crisis before financial markets were already in a state of collapse.

Beyond whatever role economists played in creating and legitimating the state of affairs that produced the financial crisis and burgeoning income inequalities, there is a separate concern about the integrity of economics as a descriptive, purportedly scientific discipline. Without wading into the debate over whether or not economics is in fact a science, it’s important to note that other fields (including highly empirical fields) are confronting similar institutional crises over the appropriate role of private funding in research.

Back in January of this year, a number of economists from the American Economic Association (AEA) wrote a letter to the group’s president calling for increased disclosure requirements. Problem is, the conflicts of interest facing the economics profession extend all the way to the board that would have to implement different ethics rules. When asked about the likelihood of rules from the AEA, economist James Galbraith told Reuters, “You can’t have an ethical code unless ethical people design it. No sign of that sensibility at the AEA. I think what should happen is the formation of small societies with codes joined by subscription. Then people could distinguish between economists who avoid or disclose conflicts, and those who do not.”

Even if such alternatives arose, you’d almost have to be an economist to believe that disclosure alone would eliminate or resolve these conflicts of interest. Providing perfect information about funding sources doesn’t address the larger agenda-shaping affect of money, especially since network effects in academic research can be very determinative about what it’s advantageous to write about. There are also information asymmetries that disclosure cannot solve. Hill staffers and representatives holding hearings, for example, do not have a formula that tells how to discount something when it comes with a disclosure statement. Nor is there any reason to be assured that the norms of publishing even after disclosure will reflect the interests of either the public or the field of economics. This is particularly true if the market in readership has divergent interests (e.g. private business leaders and other potential funders). In short, disclosure is a partial solution at best.

I want to say that it still seems more appropriate for the economics profession rather than the government to address this conflict of interest. But the past few years have severely weakened my faith in institutions’ ability to self-police and serf-regulate, even when its in their own longterm self-interest.

Debt forgiveness as economic stimulus

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This entry was originally posted at The HLPR Blog: Notice & Comment.

Following up on an earlier piece about the student loan bubble, I wanted to share two graphics that depict the over $550 billion in student loan debt carried by U.S. households. The first shows 2011 student loan debt relative to 2000 debt.

The second reveals how much faster student loan debt has grown relative to all other household debt. If you look closely, it’s possible to notice that since 2008 Americans have reduced their dependence on credit with the exception of student loans.

With default rates rising, the student loan bubble has gotten a lot of attention in the past few months. The Chronicle recently reported that students are bearing an increasing percentage of university costs. A piece at the Washington Monthly demonstrated that many of the added costs have come from increased administrative hiring. And a number of other articles have explored how the debt has impacted people in their 20s and 30s. While it’s tempting to debate how the student loan bubble is or is not like the subprime mortgage crisis, I simply want to note that it has the same potential to create political rifts when the debt proves unpayable.

During the debt ceiling debates back in July, Rep. Hansen Clarke (D-MI) proposed a resolution in the House entitled “H.Res. 365 — Expressing the sense of the House of Representatives that Congress should cut the United States’ true debt burden by reducing home mortgage balances, forgiving student loans, and bringing down overall personal debt.” While this bill is just sitting in committee, it seems noteworthy for being one of the only post-crisis bills that acknowledges what’s actually straining the global economic recovery: high levels of private debt.

The political turmoil in Europe, the subprime/foreclosure crisis, and the student loan/unemployment disaster facing the United States all boil down to the same issue. Creditors made a lot of bad, risky loans leading up to the financial crisis in 2008. But rather than take losses for those loans, what we’ve seen across Europe and the U.S. has been an attempt to use the legal system and political pressure to make sure these creditors get 100 cents on the dollar. Borrowers and, in many cases, taxpayers (in the form of austerity programs) have been tapped to make sure that debt does not get written down. In the U.S., politicians have proven more willing to see homeowners foreclosed on than ask banks to start refinancing mortgages, and student loans were made virtually unforgivable in 2005 when the bankruptcy code was amended.

These outcomes are not mandated by economic principles. Rather, they are political choices that reflect a systematic preferencing of creditors over borrowers. They also happen to be economically bad policies. After a bailout and two rounds of quantitative easing, banks have still not resumed the lending necessary to achieve sustained job growth, and politicians need to realize that policies that protect creditor interests at the expense of an over-leveraged population are postponing economic recovery.

With private debt at record high levels, debt relief (whether in mortgage writedowns, loan forgiveness, or some other form) has enormous potential as an economic stimulus. It would free a portion of people’s paychecks to start purchasing again, stimulating demand and creating jobs. And it would keep many others in their homes. As Kenneth Rogoff, a professor of economics at Harvard and former chief economist of the IMF, recently wrote, “the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.”

This deleveraging process can happen through austerity and defaults or it can happen through sensible policies that write down debt in ways that can stimulate the economy. David Graeber has written a fantastic book, Debt: The First 5000 Years, that shows how debt has been at the middle of political disputes for all of recorded history. And Bob Kuttner noted quite early in an excellent piece for the American Prospect that debtor-creditor tensions are likely to become far more pronounced and more central to our political debates.  Debt resolution is already threatening the stability of the European Union. The sooner American policymakers realize what the current phase of the financial crisis is really about, the sooner we can devise a coherent response and begin the recovery.

Now that the debt ceiling has been raised, can we get around to abolishing the debt ceiling?

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Originally posted at The HLPR Blog: Notice & Comment.

On August 2 of this week, the United States successfully—if you can call it that—raised its debt ceiling for the 10th time since 2000. Regardless of the merits or un-merits of the deal that was eventually reached, the negotiation process was overwhelmingly bad for the country’s fledgling economic recovery. America’s reputation globally has suffered as a result. China’s state run paper called the negotiations “dangerously irresponsible,” and many commentators thought the US was coming perilously close to a constitutional crisis.

The country may be suffering from a bit of debt ceiling fatigue at the moment, but given the harm that the past few weeks have done, the United States needs to get around to abolishing the debt ceiling before this situation repeats. It would be a good signal to markets and remove political uncertainty that’s likely to keep US interests rates up, and it’s important for the continued stability and civility of our political system.

In case you need persuading that the debt ceiling should be abolished, I recommend this article by James Surowiecki at the New Yorker or Annie Lowrey’s piece in Slate from back in May, where she referred to the debt ceiling a “historic relic” with a “horrific downside and negligible upside.” And on August 1, Bruce Bartlett, a former policy advisor to Presidents George H.W. Bush and Ronald Reagan, laid out a persuasive argument for the debt ceiling’s abolition, explaining that:

“Even if the Treasury avoids default on government debt this week, we will inevitably have to go through the same political drama the next time the debt limit runs out and every time thereafter. And sooner or later the shoe will be on the other foot, as Democrats hold the debt limit hostage against a Republican president.”

“Unfortunately, the option of just letting the debt limit expire is not available. It is permanent law and can be abolished only by repeal or by a ruling by the Supreme Court that it is unconstitutional.”

Given the fight that was just waged over raising the debt ceiling, I am rather skeptical that the Republican-controlled House is prepared to repeal the debt ceiling at the moment. Neither party, it seems to me, has the proper incentives to give up this political bludgeon willingly. As Michael Shear stated, “it may be impossible for Washington to put the debt ceiling genie back in the bottle.” Whether the debt ceiling statute is unconstitutional is another matter.

Bruce Bartlett has also written an excellent summary of the constitutional issue and has compiled some of the best arguments for and against the executive branch’s invoking the 14th Amendment to avoid hitting the ceiling. While most of these arguments focus on whether the President was empowered by the 14th Amendment to authorize the Treasury Secretary to continue issuing debt, the relevant question is whether the legislation establishing the debt ceiling is itself constitutional. Niel Buchanan at Dorf on Law has addressed exactly this issue and argued that the debt-limit statute is unconstitutional because it separates Congressional spending from the authorization to raise money to pay for those obligations.

Alternatively, it might be possible to argue that Congressional action that calls into question the United States’ debt might itself be unconstitutional. As Jack Balkin has written:

“Secretary Geithner does not believe that the President is allowed to violate the Constitution himself to stop congressional Republicans, but it does not follow that what the Republicans are doing is constitutional.

The press so far has been asking whether the debt ceiling is constitutional. The correct question they should ask is whether the Republican strategy of hostage taking violates the Constitution.” (emphasis in original).

As most legal commentators have recognized, standing and the political question doctrine pose hurdles to the Supreme Court ever ruling on the issue. Given the enormous damage this game of political chicken caused and how perilously close the nation came to an unprecedented constitutional conflict, however, these questions are worth exploring in more depth—and soon.


Short-termism is a kind of contagion

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An emphasis on short-term performance does not always produce a long-term viable strategy. That looks obvious enough when typed out. But short-termism has become the prevailing logic of many American institutions, none more radically than those institutions that make up its financial sector. As Sheila Bair noted in an op-ed on her last day as chairman of the FDIC, our media, political institutions, and businesses fall victim to this tendency, and it has begun to undermine our long-term stability.

To persist in acting this way would require a kind of insane faith that what’s good for now is good for tomorrow. It’s the story of how every tragedy of the commons ends badly. These attitudes, however, persist less because of any rational deliberation than because institutions can easily devolve toward incentives that reward short-term results.

One principal reason for this is that short-term strategies have a tendency to spread. In a way, this might even be a more general feature of unrestrained competition. I want to make a slightly tenuous comparison to evolution before returning to the more general point.

Assume there is a small plot of land with two unrelated breeds of plant. If plant A can absorb soil nutrients faster and outbreed plant B, it will proliferate and might eventually displace plant A entirely. This is known as exploitation competition. The evolutionary pressures on A then become 1) to either depend on fewer nutrients, 2) develop a some alternate replication strategy, or 3) simply beat B at its own game, by reproducing faster and extracting nutrients more quickly. The last of these is the one I want to emphasize: Short-termism is self-reinforcing and it is contagious. When B’s reproductive strategy is on short-term success, it redefines the game for A. Eventually it becomes the only game left. This is what kudzu did when introduced in the southeastern United States. Taken to an extreme, quite literally, this is the logic of cancer.

In other words, if B chooses to play a shorter-term game than A, that redefines the game A must play to survive. Market competition is also susceptible to this dynamic, and in many ways it may account for some of markets’ successes. The process can weed out under-performers and produce more efficient manufacturing processes. But it also weeds out other business models that under other conditions would be perfectly viable and sustaining.

This fact alone should also provide a compelling reason for market regulations—something I’ll write about another time—but this dynamic also means the following: If a business starts engaging in rent-seeking activities (i.e. attempting to influence government into creating a legislative or regulatory playing-field more favorable to its interests), then quickly other competitors, other businesses, and even entire sectors may be forced to follow suit.

To make the link now to the financial sector: Incentives in the financial community have become tied closer than ever to short-term performance. Such incentives have the potential to reward speculation, and the 2008 crisis revealed that these incentives have the potential to reinforce bubble-generation. Extreme short-termism redefined the terms of competition. It drove firms that emphasized longer-term performance and responsible practices to obscurity and irrelevance, and it drove many organizations into riskier positions to remain competitive (e.g. the decision at Fannie Mae to get into subprime mortgages in 2007). It should not be surprising that given the ways that incentives were linked to performance that the terms of competition became what they did.

Nor is it surprising, as Bair notes, that short-termism has come to characterize many of Wall Street’s interactions with Congress and other regulators. Rent-seeking through lobbying and other activities directed toward obtaining a favorable regulatory playing-field have now become part of the ways that businesses in America compete. To take one easy example, provisions of Dodd-Frank that were seen as restraints on business were cut, watered down, and those that were left in have been implemented half-heartedly. And that happened despite a general consensus that Dodd-Frank was not aggressive enough in providing the US the framework it would need to respond to another financial crisis.

[Legislators are now plagued by a similar dynamic of having to fund-raise to keep up with each other, with a short-term focus on reelection rather than on governance. This further exacerbates the influence Wall Street spending can have].

Given the various ways in which Wall Street successfully defeated attempts to impose new regulations after the 2008 crisis, we would expect that the financial sector would be well-positioned for the coming decade or to handle another crisis. But this hardly seems to be the case. The shadow banking system, probably the single largest accelerator of the crisis’ spread remains largely unregulated. Banks are fighting tooth and nail against hightened capital requirements. And the fact that large financial institutions pushing for austerity measures is so shorted-sighted as to ignore any possible interdependence between growth and a healthy middle class. Etc. etc.

Perhaps the most insane thing about all of this is that large financial institutions and proponents of deregulation are so short-sighted that they believe this kind of game is actually serving their interests. [Or maybe the game is just to be the last one standing?]

To quote a post at Digby’s blog about Murduch’s ability to rapidly corrupt the WSJ, one of the world’s “most important sources of financial news”:

I think this may be the best sign yet of just how crippled our institutions have become. If there is one group in the world who should demand unadulterated facts and data it is the financial community. Sure, they’ll play it to their advantage, and care not a whit about how it affects our democracy. That’s not their job (although it is their duty as citizens.) But they simply cannot function properly if their information is tainted.

The invisible hand produces races to the bottom just as often as it produces self-regulating systems. We have failed utterly to keep the terms of this game from keeping this short-term contagion in check. When that happens, even the winners are at risk.

Photo credit: Galen Parks Smith.

Debt: The First 5000 Years

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This is just a short follow up on my last post, to observe that there’s absolutely nothing new about the dynamic underlying the economic policy of the United States or the resistance to the austerity packages we’re seeing across Europe. I just ordered David Graeber’s excellent-sounding book, Debt: The First 5000 Years. If this summary is any guide, Graeber is suggesting that debtor-creditor relationships predate currency-based markets and are one of the fundamental organizing devices in human history:

Every economics textbook says the same thing: Money was invented to replace onerous and complicated barter system—to relieve ancient people from having to haul their goods to market. The problem with this version of history? There’s not a shred of evidence to support it.

Here anthropologist David Graeber presents a stunning reversal of conventional wisdom. He shows that for more than 5,000 years, since the beginning of the agrarian empires, humans have used elaborate credit systems. It is in this era, Graeber shows, that we also first encounter a society divided into debtors and creditors.

With the passage of time, however, virtual credit money was replaced by gold and silver coins–and the system as a whole began to decline. Interest rates spiked and the indebted became slaves. And the system perpetuated itself with tremendously violent consequences, with only the rare intervention of kings and churches keeping the system from spiraling out of control. Debt: The First 5,000 Years is a fascinating chronicle of this little known history—as well as how it has defined human history, and what it means for the credit crisis of the present day and the future of our economy.

UPDATE (11/7/11): I wrote a review that was published in Guernica a few weeks back.