I read in today’s paper that another massive investor fraud has been revealed, this one allegedly perpetrated to the tune of $8 billion by Sir Allen Stanford, a Texas billionaire who owns the Antigua-based Stanford International Bank. My first question, of course, was how a Texas billionaire becomes a knight of the realm, but Wikipedia tells me that Sir Allen, who obtained Antiguan citizenship ten years ago, was knighted some years later in a ceremony performed by the country’s British Governor General. My nationality and my general lack of high achievement making it unlikely that I will ever receive such a reward, I have not spent much time thinking about the British honors system, but I do wonder if being knighted by a Governor General somehow makes you a lesser knight than someone whose knighthood was bestowed directly by the Queen. No doubt all will be revealed in due course as the story plays out in the media.
The Stanford affair, like those of Bernie Madoff, John Thain and his $36,000 commode, and Bob Nardelli and his $210 million kiss-off from Home Depot, brings to mind the old adage that the problem with socialism is socialism, while the problem with capitalism is capitalists. None of these people have – so far, at least – been convicted of any crime, and many have been accused of no crime at all. The crimes that have been committed are hardly victimless, but all the same I have yet to hear of any of Bernie Madoff’s investors sleeping rough and begging for spare change in front of Grand Central Station. Instead, the greatest victim of all this misbehavior is the capitalist system itself.
We know socialism doesn’t work. Capitalism does, at least most of the time, but the shameless behavior of our lords of finance and captains of industry is enough to make even the most ardent advocate of capitalism want to see these people punished and humiliated. It is their sense of entitlement that galls.
Few people begrudge Bill Gates his incalculable wealth. His drive, his smarts, and some good luck created one of the most successful companies in history. His wealth comes not from bonuses or stock options but from his continued ownership of a big chunk of the company he founded. Most of these other people, though, are hired help, not entrepreneurs. There is no evidence that any of them ever had an original idea or ever took a risk – at least not with their own money. Some of them may be smart, but most are not half as smart as they think they are.
The Infinite Monkey Theorem – the idea that an infinite number of monkeys sitting in front of typewriters for an infinite time would eventually produce the complete works of Shakespeare – is unprovable, though according to some people with better math skills than mine it is unlikely. We do, however, know with some certainty that a monkey appointed as CEO of a major financial institution or industrial company could not destroy value as efficiently as some Harvard MBAs (e.g., Stanley O’Neal, former boss of Merrill Lynch, and Rick Wagoner of GM) have done. To his credit, Wagoner has not fed as deeply at the trough as many other corporate heads have, but what in the world was he thinking when he flew to Washington in the corporate jet to beg for $17 billion in government hand-outs? I read today that GM is already asking for another $14 billion from the American taxpayer.
The anti-globalists and anti-capitalists are among the only ones cheering in the current crisis, gleefully predicting the collapse of capitalism and hoping, together with what’s left of the Republican Party, that Obama’s stimulus package and financial bailout plan will fail. The populists and protectionists, from Lou Dobbs to Naomi Wolf, can hardly conceal their delight (in Dobbs’s case cleverly masked as innocent outrage) that protectionism is once again on the march. As easy as it is to ridicule some of these people, there is a serious threat here.
A Google search for “the problem with capitalism” comes up with 14.7 million entries, a sizable number of them explaining how the current crisis reveals the rottenness at the core of the free enterprise system, and suggesting some form of socialism as the remedy. Ideas do have consequences, and it would be naïve to think that many of the countries that have only recently begun to make tentative steps towards economic liberalization will not stop or backtrack, asking themselves whether the rewards from opening their economies will be worth the pain of transformation.
Capitalism is a kind of social contract, in which a society allows some people to become very wealthy and in so doing make everyone else better off. This has nothing to do with trickle-down economics and everything to do with what Karl Marx praised as a system that in the scant 100 years to 1848 when “The Communist Manifesto” was published, “has created more massive and more colossal productive forces than have all preceding generations together.” Praise as unstinting as that of John Doerr, the legendary Silicon Valley venture capitalist, who called the Internet “the greatest single legal creation of wealth the planet has ever witnessed.”
This social contract, like all contracts, can be broken by either side. When the “bourgeois capitalists,” to use Marx’s term, violate their part of the bargain society will no longer excuse their excesses. When their rewards far exceed, or are seen to far exceed, the benefits they produce, it can’t be long before they are carted off in tumbrels like the grandees of the Ancien Régime in Revolutionary Paris.
What is happening now cannot be blamed entirely on greedy Wall Street bankers or insensitive CEOs. Instead, we are going through a period of what Joseph Schumpeter called the creative destruction that characterizes capitalism. Technological advances change relationships of production and cause some industries to vanish while new ones are created in their stead. It’s hard to have much perspective on this when it’s your job and your community and your retirement savings suffering the brunt. Misguided monetary policies have also played a big part in creating the bubbles that have popped with such devastating impact, but that’s a subject for another post.
The point I’m making here, and yes, I am glad you asked, is that when so many of the leaders of the capitalist system are rewarded for failure and granted bonuses for losing money and destroying value, and then act as if these goodies are their God-given right, it gives the capitalist system a bad name. In a time of crisis, this kind of behavior can turn popular sentiment against a system that has served us pretty well, and pave the way to something far less appealing.
I would be happy to see the City of New York rebuild the public stocks and pillories that in colonial times stood where City Hall is today, just north of Wall Street, and lock some of the more egregious abusers of their privileges in there for passers-by to gawk and throw the occasional tomato at. Of course, we are far too civilized to do that sort of thing nowadays. I suppose it’s too much to expect that people who have never let an appetite go unfulfilled would suddenly adopt some self restraint, but it doesn’t hurt to ask. The world as we know it could well depend on their answer.