The Banksters

Some of the most interesting stuff in D.C. is going on at the Federal Crisis Inquiry Commission. Here is the link. Check out some of the stories in the news section. The most puzzling thing is how few media are covering it. If we are to make sound policy decisions, we need to know the causes of the financial crisis. This is still very much in dispute.

Here is a recent story on FCIC hearings.# At dispute are not only the causes of the crisis, but the remedies. Specifically, the taxpayers bailed out AIG who bailed out the big banks that were part of the cause of the crisis, particularly Goldman Sachs and Societe Generale (a French bank). AIG had sold them credit default swaps, which were "insurance" on their investments. If AIG had gone bankrupt, these would have been worthless. Yet federal regulators paid 100 cents on the dollar on these claims after the taxpayers bailed AIG out. This smells of insider dealing, particularly between the big banks and the New York Fed (led by Geitner). I have not found a persuasive argument for why they did this.

We need to go back to the days of the initiation of TARP to find some of the answers. It is interesting how Lehman was allowed to fail and Bear Stearns owners got cents on the dollar, yet how Merrill was sold to Bank of A in a questionable deal and Goldman managed to make it through unscathed. Is it just a coincidence that Paulson was the former head of Goldman? And how about Rubin? The fifth large investment bank was JP Morgan which was arguably more cautious. And how did these investment banks manage to change to bank holding companies in the nick of time to be able to gorge at the Fed discount window?

The FCIC is having a forum on the causes of the crisis tomorrow and Saturday. Here is the link to the rough draft of one of the presenters, who argues that changes in the banking industry, specifically the increasing power of shadow banking, led to a panic. But it wasn't a panic of depositors like the 1930's bank failures. It was a panic of institutional investors in the "repo" market.

The whole story is not out there. We should be paying attention to this. We have new books out next month by Michael Lewis, Simon Johnson and Roger Lowenstein which should be interesting. While I tend to see the ultimate results of the Wall Street House of Cards as something that was beyond the vision most of the players, who were also drinking the kool-aid,* the way AIG was handled troubles me deeply. This was after the crisis hit and it looks like a huge rip-off of taxpayers.

While many predicted the housing bubble, almost nobody saw the ultimate results of the bubble's burst. Perhaps the most prescient was Nassim Taleb, who published Fooled by Randomness in 2004. There he argued that the quants on Wall Street had deceived themselves and everyone else by thinking that they could model the risk that traders were taking. We already had this happen in 1998 with Long Term Capital Management. Why didn't those in the know learn from that episode? There are many questions and few very persuasive answers in this whole tale.

*There was a good article in Economist's View Feb. 18 on how insiders could be so self-deceived.

#I can't figure out why this link is failing. It was an article on Feb. 23 at bloomberg.com by Richard Teitelbaum. I posted in on my Facebook page. Hat tip to my friend Scott for the article.

Iran class

My six-week class on the history of Iran at the OSHER Institute ended on Wednesday. The young historian working on his dissertation, Zachary Heern, was very good. His wife, who escaped Iran through a camel ride to Pakistan when she was 10 years old in 1984, spoke during the last hour about her experiences. It was very moving and they were lucky to make it out. She was a member of the B'hai faith which is persecuted mercilessly by the government of Iran. She had one strong message about it though on differentiating a government from its people. Many of her Muslim friends and neighbors helped them greatly.

Iran is a complicated place, home to many ethnicities. There is a contradiction between its Persian heritage and the views of Shi'a Islam, which was adopted by most in the 16th century. Persia was one of the oldest civilizations with urban settlements dating back to 7000 B.C. Zoroastrianism was the first recorded monotheistic religion. Farsi is the main language but the Koran is written in Arabic. The Sufi poets who are greatly revered write about many things that fundamentalist Islam disapproves, such as the joys of wine, beauty and sex. And there are different kinds of Shi'ism depending on which Iman is most revered. Its government is a constitutional theocracy. Here are a couple other fun facts: only 1.4% of the population attends Friday prayers and women make up 60% of the university student population. Beware of sterotypes!

Anyone who knows any of the history of Iran knows that the CIA and Brits orchestrated an uprising against the democracy movement in 1953 and reinstalled the Shah on the throne. I now have some good book recommendations which include one on current intellectual thought in Iran and one criticizing the fundamentalist movement in Islam by a cleric who now teaches at UCLA. My best wishes to those who fight tyranny today.

Brooksley Born

I watched the PBS Frontline special again last night on how Ms. Born attempted to investigate over-the-counter derivatives in I believe 1997, and how Greenspan, Rubin and Summers rather forcefully shot her down. Why were they so adamant that she not look into regulating these creations of Wall Street? Born is pretty impressive. I keep seeing her talking about "dark markets." Here is President Clinton's speech when they repealed Glass-Steagall in 1999.

Another really weird event was the fact that when the Fed rescued AIG they paid off AIG's credit default swap counterparties, Goldman Sachs and their cousins, 100% on the dollar. No haircut on the arguably worthless paper. Maybe one of my big business buddies will explain this to me soon.

Rereading some of Paul Krugmans' The Return of Depression Economics and the Crisis of 2008 a couple nights ago. He says CDO's were the crucial Wall Street creation to the meltdown (pp. 149-152), since this allowed the investment banks to carve up mortgage-backed securities into tranches, thus enabling them to pass the top tier on as AAA. Mortgage-backed securities had been ok when they were based on sound lending decisions. I am still in agreement with Cassidy and others that the primary source of instability was the irresponsible actions of bankers, traders and other financial types. But they were just being typical greedy humans of a particularly obnoxious type. We needed more rule of law here. Of course, fashioning a workable law is a big obstacle. I like the Volcker rule but how do we draw the lines? I think it could be done, but I don't think Congress will do it, which is a sad commentary on our government.

Krugman also supports the view that nobody really knew what they were doing (p. 152), so I'm not quite ready to become a conspiracy theorist. He also has some interesting things to say about the power of hedge funds (see e.g. the attack on Hong Kong at pp. 127-131). Also good stuff on the shadow banks. An interesting book. I may have to read the whole thing again.

Relentless Revolution to Now

In America, the late 1800's is often called the Gilded Age. This was the age of large increases in the size of corporate entities and large increases in corruption of government by big money. Labor movements arose to protect the welfare of workers. There was an explosion of laws passed by state governments to do this, but the Supreme Court ruled that many of these were unconstitutional because they violated the “freedom to contract” that was held to be part of the Constitution. Around the time of World War I we saw the two most important constitutional amendments since the post-Civil War amendments (13-15), which gave blacks the rights of citizens. These were the 16th Amendment which created the national income tax and the 19th amendment which gave women the right to vote. Interestingly, the 17th amendment made senators appointed by popular election and the 18th amendment, which was later repealed in 1933, established prohibition of alcohol. The only two nontechnical amendments after that were limiting the president to two terms and eliminating the poll tax.

There is no question that the American economy soared after World War II. Appleby writes that it grew by 50% during the war. The reasons for post-war prosperity are still debated, but it seems pretty clear that the war was connected with the ending of the Great Depression. Most of Europe was destroyed as well as large sections of Japan. The U.S. infrastructure was undamaged and we entered a economically great era, not only for the economy as a whole but for workers. According the Appleby, this progression ended about 1973. “Disparities among all employed Americans shrank all through the postwar era until 1973. The rising tide, extolled in business literature, buoyed by strong unions, did lift all boats” (p. 324).

Of course, virtually no one at the time saw this year as a pivotal one. To pay for the Vietnam War, LBJ had printed money rather than raising taxes. The result was the weakening of the dollar, which led the U.S. to go off the gold standard in 1971. The price of oil also quadrupled. On average, the rate of growth in the capitalist world halved during the next fourteen years. American oil production reached its zenith in 1955, by which time two-thirds of the world’s oil passed through the Suez Canal. The U.S. had supplied almost 90% of the oil used in World War II.

The late 1970's produced the phenomenon known as “stagflation,” inflation accompanied by high unemployment. Keynesian prescriptions for ending recessions came into question. Not only increasing oil prices, but the failure to cut off popular spending programs when recessions ended contributed to inflation. “The comfortable understanding among big business, big labor and big government was coming apart” (p. 331). We entered into an era where deregulation, in order to promote competition, became a moving intellectual force. Its most popular theorist was Milton Friedman, who explained that a volatile inflation rate contributed to unemployment because it contributed to uncertainty. He also recommended a new monetary policy, but in actual practice this was only employed for the years 1979-82 and failed to prevent a recession. And deregulation of the banking industry led to the savings and loan crisis of 1981.

The story of the 30 years since Reagan took office is a very disputed one today. This should not be surprising, as it is always harder to discern important patterns in the recent past. The Japanese manufacturing system improved production by “exquisite attention to detail and made cost-efficient by constant improvements in every phase...where personnel in research, design, sales and production worked closely together” (p. 338). The arrival of the personal computer, and later the internet, drastically changed capitalist countries. These were also personally popular, which astounded experts as much as the popularity of the television in the 1950's. Equally surprising, while the quality of computers drastically increased, the price decreased annually by 20% per year. But, “after astounding the world, Japan slid into a prolonged recession in the 1990's”...and “exposed some of the structural weaknesses in the Japanese economy, the most prominent being the cozy relationship between its leading banks and corporations and the government” (p. 356).

This era saw the rapid economic growth of southeast Asian countries (the “Little Tigers”), lifting many out of poverty. They did this by finding export niches in the world economy, aided by their “people’s commitment to acquiring the skills and learning for labor-intensive, complex production processes” (p. 353). “In a unique mix of government direction and free market dynamics, these countries have confounded many an economic prediction, none more hallowed than the idea that inequality accompanies economic development” (p. 355). And now, of course, we have seen the dramatic rise of India and China.

In the closing chapter of the book, Appleby delves into our current troubles. I will leave the details aside, other than a couple observations. She divides capitalism’s critics into three groups; one sees capitalism as destroying society through the materialistic preoccupations of citizens. “Others fight capitalism for the sins of globalization that has enlarged the scope of the rich countries’ rapacity at the expense of the vulnerable poor. The multinational corporation is the bogey of the antiglobalization movement because it is seen as acting without social responsibility or sensitivity to human needs. Critics depict multinationals as octopuses whose tentacles cling to any profit-promising scheme, however dubious. A third group wants to work within the framework of capitalism to make the system more open, more fair, and as responsive to people as dollars” (p. 423).

She says that Americans “are learning that what’s good for a national economy is also good for a global one; competition, open access, and cooperative ventures. Nothing promotes growth more than having rich neighbors...” (p. 435). I question whether the majority of our population has learned this lesson.

She also calls the government and the economy the “two leviathans” in our lives. When corporations and government work hand-in-hand we are left without some of the checks and balances for which our Constitution is famous, and “the market’s own corrective mechanism will be disabled.” While in the near future, our close encounter with disaster may provide more self-regulation, in the long run we need to improve our systems of financial regulation.

Appleby’s conception of the history of capitalism is one of continuing pervasive changes in economic structure, society, government, law, values and human experience; a relentless revolution...often moved forward by scientific and managerial innovation...creating greater wealth, but often dangerous byproducts. It is not a unified, coordinated “system,” but rather “a set of practices and institutions that permit billions of people to pursue their economic interests in the marketplace” (p. 433). Where it goes from here is speculation.

One’s perception of the current state of the world depends on one’s meta-narrative of history. When I read accounts of the current fiscal crisis at the CATO Institute (see “A Perfect Storm of Ignorance” by Jeffrey Friedman in the new issue and “Did Deregulation Cause the Financial Crisis” by William Niskanen in the July/August edition), I am struck that some people are living in a different world because their view of history is so different. I get the same feeling reading Naomi Klein’s The Shock Doctrine. I don’t expect those who see the world as these authors do to change. One’s view of history gets bound up with one’s identity, which may itself just be another narrative construction, among various possible sources of disagreement. After all, people are still arguing about the causes of the Great Depression and the Industrial Revolution.

Obviously, I think a lot of what Appleby has to say is right. And I think we need some structural changes in our financial regulations. I am also skeptical that we really understand our current situation. But I am not a total skeptic, as the writers at the CATO Institute seem to be. Below are a couple articles, the first from the current issue of The Economist, on these problems. I should stress that this periodical is one that espouses a positive view of capitalism. The second is a humorous review of various books on the recent financial crisis that perhaps reflects a rather left-leaning cynic’s view of the financial world. Time to reign in the Masters of the Universe.

Link to Http://www.economist.com/opinion/displaystory.cfm?story_id=15474137

Link to Http://www.thebaffler.com/viewArticle/131/0/1/

Fixing Congress

I have thought for some time that we will need a constitutional amendment to fix Congress. Here, Lawrence Lessig gives a good account of why this is so...Congresspeople are more interested in raising money to campaign than anything else. The recent Supreme Court decision in Citizens United made the need for an Amendment clearer, although I think we can trace the problem back to Buckley v. Valeo, after Congress had been shamed by Watergate to curb abuse, and then had half of the solution declared unconstitutional. Lessig blames Obama, and maybe that is fair, but the bottom line for those who thought there was going to be radical change is that they are bound to be disappointed.

A recent poll indicates that the public does not see the corruption of Congress by money as being an important issue. Ezra Klein provides a link in this article, and a response. In order to have a Constitutional Amendment based on 38 states voting for a constitutional convention, you would have to have overwhelming public support. If people haven't come to the conclusion that we need structural change by now, I seriously wonder if it will ever happen. Both writers seem to favor the Fair Elections Act, although Lessig says the Supreme Court would declare it unconstitutional. But will the populace ever favor public financing of candidates who opt out of the traditional funding sources? In these days of raging budget deficits? I don't think so. Campaign contributions need to be limited in amount and limited to citizens (corporations are not citizens). The government can require debates in return for use of the airwaves; attack ads do nothing to further reasonable debate. But again, that is a constitutional amendment.

Campaign contributions aside, we still have the issue of lobbying. Obama has been making attempts to limit its effectiveness, but this article indicates that we need something stronger. And I don't think just keeping former legislators from lobbying for seven years will do it, as Lessig suggests.

Is this country so on the brink that some radical change is necessary? Let's hope not, for I don't see it happening in the near future.

As much as I like Obama more than either political party, his first year has involved some missteps. He opted not to follow Clinton's method of proposing a crafted change to health care of his own. Instead, he let Congress create it, albeit with pressure from the White House for certain principles. Rather than adopt as a structure a bipartisan idea like the Wyden-Bennett bill, they started from scratch. The drawn-out process of Max Baucus' committee eventually killed public support. Once again, leaving it to the old Senate bulls prevented change. I think the reason the public became so disenchanted was that it began seeing the legislative process more clearly, with all the horsetrading going on for votes with special perks going to certain states, like Nebraska. They don't understand the bill and who can blame them, at the length the bill took to get in all the various favors. I thought the bill was actually a good step forward, but at this point I am ready to start over. Or do something less massive and get some real research going on health care costs because the experts do not agree what to do or even how many different problems there are.

The one potential positive major item that could receive strong public backing is reform of the financial industry. I believe that this is also going to be very disappointing because Congress cannot get it through its head that business-as-usual is no longer acceptable. And there is a lot of money flying around here. But perhaps the continued failure of such measures will finally convince more members of the public that there needs to be structural change. The law evolves slowly. It is made by Congress with the Court making Constitutional interpretations. We had a terrible situation regarding corruption in the late 1800's and early 1900's. The Supreme Court was behind the ball but eventually changed, during the Great Depression. Let's hope we don't require such a catastrophe this time.

The recent polls show that most people are worried about the economy and jobs. This is always the way it is. When economic times are bad that is what most people care about more than anything else. So when we get past this recession maybe we can hope for better. It is also getting clearer that the Republicans are going to gain back many seats in the fall election. A lot of Democrats see this as a reason to get what they can done now. However, I think that they would be looking at a backlash from the public who is fed up with the way things get done in D.C. And Republicans at some point have to stop the delay tactics and start to help govern again. Don't they? Maybe that will happen after the fall election.

But I don't realistically hope for much. Social changes usually happen slowly. Evolution vs. revolution. There is no reason to think things will be different this time.

Relentless Revolution II

This is the second and perhaps last instalment of my cataloguing what I think are the insights of Joyce Appleby's book. Of course, you have to read the book to see the evidence for these claims. Both individuals and societies are formed by their histories. You can't know where you are unless you see where you came from.

One social change capitalism engendered was long hours of disciplined labor. While peasant work was certainly strenuous, the rhythms of peasant life varied with the season and the weather. Laborers worked especially hard in the spring and harvest, but other times were reserved for play and community events. In England, a logical development of the need for owners to monitor and coordinate their employees’ performances was the factory. Twelve-hour workdays became the norm, producing conditions for workers clearly more onerous than their ancestors. “Taking the long view, economists can show that making goods cheaper usually ends up creating employment by releasing demand for other commodities. The pain comes in the short run, and many an English worker reacted to the pain with bitterness. In the second decade of the nineteenth century, Yorkshire laborers whose families had sheared sheep for generations smashed the shearing frames that were undermining their way of life” (p. 152). These were the Luddites, who declared war on machines. Destruction of property evoked savage responses from the elites who controlled government.

As European contests for supremacy increased, governments needed more revenue, and so heavy import tariffs became prevalent. Various combinations of European countries went to war eight times between 1689 and 1815. This, in turn, motivated these countries to extract as much wealth as they could from their holdings in the “new world.” Sugar became the most lucrative venture. Sugar cultivation needed large numbers of laborers, which eventually resulted in the slave trade. Between 1501 and 1820, 8.7 million Africans were shipped to the Western Hemisphere. Sugar trade showed how the power of the profit motive could override any cultural inhibitions to gross exploitation. And it didn’t even produce long-term benefit for those regions using slaves.

Various histories of the industrial revolution have favored particular causes–high wages and low fuel costs, secure title to land, agricultural improvements, low taxation, the rise of cities, and scientific culture. Appleby sees these influences as mutually enhancing. Ideas were as important as material developments. During this process, the cause of human rights arose to motivate two generations of reformers. In the United States, this eventually led to the abolition of slavery. As Appleby notes, “when New York law denied legitimacy to holding human beings as property, it constituted the largest peaceful invasion of private property in history” (p. 162).

During the 19th century, both Germany and the U.S. passed England in productive power. They did this partly by erecting tariffs to protect their industries. They also copied England’s spectacular new machines, including the steam engine. However, these two countries evolved in very different ways. Americans loved novelty, practiced religious toleration and celebrated the weakness of their political institutions. Germans feared novelty, fought bitterly over differences within the Christian faith and accepted authoritarian politics. Capitalism developed in very different ways. But both benefitted greatly by the building of railroads.

In 1865, the New York Central Railroad alone had assets equal to one-quarter of all American manufacturing wealth. Later, in both countries, other industries acquired great power. This was the era of Carnegie in steel, Rockefeller in oil and banker J.P. Morgan. By 1877 Carnegie’s estate contained one-twentieth of all American dollars. These industries with their high fixed costs were limited to those with large amounts of money. Already in the 1870's, American agricultural production wiped out the peasant economies in eastern and southern Europe. Many in Europe came to the new world for a new start, producing a steady stream of cheap labor. This came at the right time for corporate America, which was de-skilling many jobs as it set up factory assembly lines.

Whereas industrialization slowly developed in the U.S. and England, it came much faster in Europe, conflicting with custom and causing more class conflict. From this came anarchists trying to abolish government, syndicalists promoting massive strikes and Marx’s idea that “private property was not natural but rather a device for confiscating the benefits of industrial wealth that workers were actually creating” (p. 212). The beginning of labor activism coincided with the labor theory of value.

“The very distinctive ideology that dominated public discourse in the United States operated against organized labor. The public tended to view workers as individuals charged with taking care of themselves and their families. Thomas Jefferson made limited government a robust American value. As the champion of ordinary Americans, Jefferson believed that curtailing federal power was the best way of shrinking the influence of a moneyed elite” (p. 216). Change came slowly. President Theodore Roosevelt’s administration prosecuted the Standard Oil trust for violating the Sherman Anti-trust Act, which somewhat slowed the tide of mergers. But the Supreme Court continued to rule legislative changes in favor of workers unconstitutional into the 1930's.

The prevailing view of wages in the early 19th century, the “iron law of wages,” held that employers would always push wages down to the minimal amount a family needed for subsistence. However, in the U.S., led by Samuel Gompers, this did not happen. The eight-hour workday became common without a drop in the average wage. Workers became consumers. Up to that point, capitalist enterprises had responded to demand that was relatively inelastic, e.g. food, shelter and clothing. With workers becoming consumers, industries started gearing toward elastic demand for what were unnecessary goods; people spent out of desire rather than need. This spawned advertising. Marx had believed the downward pressure on wages would lead to capitalism’s extinction. But he was wrong. With the advent of consumer capitalism, people had many roles to play in society other than workers.

Lax state incorporation laws, begun by New Jersey, allowed easy formation of corporate entities. Between 1895 and 1904, more than 157 giant corporations swallowed up 1800 businesses. Close to 100 of these acquired a 40-70% share of their markets, thereby reducing competition. The large capital requirements for technological innovation and economies of scale also favored large size. Corporations existed in perpetuity and were given limited liability and a protected scope of action. Private banks created a market in shares of industrial securities, and new sources of capital. This American trend was the product of unique circumstances, including weak government, an abundance of cheap labor and a large public receptive to standardized products. Our federal government did not even have an effective way to raise revenue until the 16th Amendment allowed the income tax in 1913.

During this time period, European governments colonized Africa, extracting its wealth (and further abusing its people). The increase in wealth furthered their ability to make war. Whereas in the early stages of capitalism, the market economy had followed private investors, governments began to engage in capitalistic enterprises. The competition and emnity between these nations eventually led to World War I, which was followed by The Great Depression and then World War II. By 1945, the optimism of the early 1900's had disappeared. Although the Civil War in the U.S. may have been our greatest period of suffering as a nation, the period of 1914-45 plunged the world into chaos.

Corps as People?

In the history of capitalism, we saw how English law regarding food and property changed to allow the growth (existence?) of capitalism. In thinking about the recent Supreme Court case in Citizens United vs. FEC, I pulled out my old The Transformation of American Law 1870-1960 by Morton Horwitz, which has a chapter on the evolution of the law of corporations. His is a brief account, so expect a lot of complexity in the real evolution. However, even this was surprisingly complex.

In the first place, this book is about the progressive (but don’t confuse this with people who call themselves Progressives in politics today) critique of the old conservative view of law which takes as the paradigm case that of Lochner v. New York, where the Supreme Court ruled unconstitutional a state law that limited the number of hours bakers could work because it interfered with the freedom to contract (is freedom of contract “in” the Constitution?). There are many elements to this critique of the old classical view, which was based on a particular essentialist theory of human nature and an impossibly bright line between law and politics. Here, the Supreme Court was behind the times and they eventually changed their views of the Constitution. We saw this conflict continue into the 1930's, which is what spawned FDR’s very bad idea of adding additional members to the court. I am mentioning this issue partly to point out how some of the rhetoric in contemporary journalistic analysis is woefully oversimplified and often outrageously incorrect (so turn off the tv and the radio and skip the op-ed columns!!!).

The original Supreme Court view of a corporation held that shareholders were liable for the debts of a corporation even in excess of what they paid for their shares!! In other words, no limited liability, which is the prime hallmark of incorporation today. Indeed, it is more like the law of partnerships. But the court got into a confusing mess dealing with watered-down stock cases, creating two different classes of shareholders.

Three conceptions of the corporation competed for dominance after 1880. The first was that a corporation was “an artificial entity created by positive law” based on English corporate law and antebellum grant theory. The second conception mirrored the old Supreme Court view that a corporation was a “creature of free contract among individual shareholders,” in other words, no different from a partnership. The third theory was the “natural entity theory,” which viewed the corporation as a private entity, yet neither artificial, fictional or a creation of the state. Some commentators trace a notion of the “corporation as a person” back to the case of Santa Clara v. Southern Pacific, but Horwitz persuasively argues that this characterization was later projected back onto this case. It also should be noticed that seeing the corporation as a “natural entity” does not require seeing it as a person, as claimed by some liberal commentators.

I have read defenses of Citizens United based on the lack of a constitutional difference between an individual and a collection of individuals, generally by conservatives. But a corporation is no mere collection of individuals (otherwise it would just be a partnership and would not have limited liability). We have already opened a rat’s nest of issues. One would be what is “natural” about a corporation? One cannot help but notice that the transformation of the conception of ‘corporation’ went hand in hand with the increasing size of corporations in the late 1890's. Initially confined to railroads, which were seen as a special case, it spread rapidly with mergers and takeovers that drastically narrowed ownership of the assets in society. It also evolved with the creation of the stock market and resulted in positing a sharp distinction between the corporate entity and the shareholders (which by the way, Appleby sees as leading to much greater efficiency in management).

Horwitz’ tracing of the evolution of law in this area is fascinating in its own right, and I’m sure it has caused numerous debates within the field of legal history. One also sees different conceptions of economics read into the decisions. Maybe it is not so surprising that a vision of markets as self-regulating or laissez-faire is involved, but the notion of laissez-faire itself changes over time. One also sees philosophical arguments about property rights, e.g. whether they are independent of society, that enter into discussion of libertarian theories of property (not to be confused with the simple-minded libertarianism of Ron Paul). The progressive critique of forms of legal argument were begun by the Legal Realists, to whom Holmes was an inspiration. It was the subject of my proposed dissertation on the Critical Legal Studies movement in the 1980's. I now can see that I needed to understand more history and continental critiques of social science to start to get a grip on the issues. But they largely eluded training at the time in analytic philosophy, which was my primary interest.

My view that this decision is bad for the country rests on my view that the biggest corruptor of our politics is money. And who has money? Big corporations and unions. Here is a brief article by Ronald Dworkin making this case in more detail. Clearly the Supreme Court did not need to reach this issue and in the process the conservatives departed from their own views of judicial restraint. But then the doctrine of judicial activism is mired in incoherence, too.

Ultimately, my view about money and politics is something I need to think about much more. Complicated issues arise. However, it is inconsistent on many levels with views espoused by conservatives like those at the Cato Institute. One view of mine that Citizens United clearly supports is that if we are going to “fix” what is wrong it will take a Constitutional amendment. Since we know incumbents in Congress would not support an amendment limiting their powers, such an amendment would have to be accomplished through a Constitutional Convention approved by two-thirds of the states. I think the Supreme Court is behind the curve of intellectual thought again, as they were in the early part of the last century, so fixing this problem will have to go around both Congress and the Court. That seems like a mighty task.

The Creation of Capitalism

I just finished reading The Relentless Revolution; A History of Capitalism by Joyce Appleby, a well-known historian at UCLA. The book covers five centuries, so it doesn’t linger too long on any one topic. In her view, capitalism began in England with the industrial revolution, a not uncommon view, but she believes that the agricultural revolution that preceded it was the most important material factor because it reduced the number of people required to produce food. Trade was not the first stage in capitalism; this was just merchants buying low and selling high. Commerce involved too small a part of the population to create such a revolution. Capitalism began with the production of marketable goods.

Capitalism radically changed traditional society, where people were defined by their class. It transformed society by changing the laws, class structure, individual behavior and values. It changed the view of what it means to be human, although Adam Smith got it wrong. What he believed was a cause of capitalism (economic rationality) was actually an effect. Marx was also wrong in believing that coercion was necessary for the transformation, which he thought began with farsighted landlords and worked to the exclusive advantage of capitalists. What both got wrong was that they posited attitudes prior to the conversion to capitalism that people did not have, an insight of Weber. The success of capitalism would have been quite surprising to those in the process of change because resistance to change was hostile.

The success of the Dutch propelled developments in England as Brits looked across the channel and could see how wealthy the lowlanders were becoming. Although Spain and Portugal had a head start on trade, their governments maintained too much of an aristocratic disdain for work and were indifferent to the needs of merchants and artisans. The French remained entangled in feudal laws until after the revolution and their system of inheritance, which divided property amongst all sons, kept more on the land and prevented fewer from overcoming the necessities of subsistence. The English practiced primogeniture, the passing of property onto the oldest son. The English were also aided by a decrease in the power of the monarchy in the 1600's.

In England, changes in the law mirrored changes in relations to food. In traditional societies, the production of food was highly regulated by government because people were slaves to the weather, which resulted in famines, which caused political unrest. Governments needed to do what they could to deal with the famines in order to maintain control. Aspects of English law prevented the hoarding of food. It had been a felony to hold food off the market, to wait for a better price or to retail food to others.

English property law, secured centuries earlier, also changed to include intellectual property such as inventions. This allowed the extraordinary gains by natural philosophers (we would call them scientists today) in understanding physical laws to be translated into the many inventions that propelled both agricultural productivity and the creation of industry.

Corporations were initially monopolies created by the monarchy. However, in the political upheaval in England, with the diminished power of the monarchy, questions about the status of these monopolies came to be debated in parliament as many in the aristocratic class became involved in commercial activities. The model of the Dutch, where government backed commercial interests, also promoted change.

Capitalism created periods of booms of and busts. Of course, investors responded to the allure of profits during the boom. Ironically, during the bust periods, ordinary people could afford what were previously luxuries, like spices, sugar, cloth not made from wool, etc.

Economic change was bound up with social change. In traditional societies, the Bible viewed labor as both a gift and a punishment and there was a sense of awe and reverence for social arrangements (which, of course, served the interests of the clergy). Customs, not incentives, regulated the flow of tasks in society. Because people were at the mercy of the weather, they were fatalistic. Rules against usury also had to be overcome. As time went on, people became less threatened by change. Eventually, views of human nature changed to such an extent that people no longer saw themselves as prisoners of their class. This fostered notions of equality, economic freedom of the individual and individual rights.

Later, countries could adopt capitalism from the top down. But the experience of the first capitalist country was unique. In hindsight, the contingencies of a King limited by a Bill of Rights (1689) and parliament, aristocrats interested in commerce, the power of entrepreneurs, young people leaving the land and moving freely to cities and the presence and vitality of capital, allowed capitalism to occur, where in the rest of Europe change was inhibited by the fear of disorder. The social environment necessary to enable capitalists to reject the old social order was certainly not inevitable and was perhaps unlikely. This fact is often obscured by the human tendency to rationalize the past by use of simple causal constructions.

In Appleby’s view, “capitalism began when private investments drove the economy, and entrepreneurs and their supporters acquired the power to bend political and social institutions to their demands” (p. 118). The great feature of capitalism is the creation of wealth. This idea had to overcome the old mercantilist notion that wealth was a zero-sum game. It led to modern moral notions of equality and individual rights, including increased rights for women. But there are also dark sides of capitalism. Capitalism did not eliminate oppressive upper classes; it just changed how they came to power. Although slavery had existed since ancient times, capitalism made it into an industry. Prior to 1740, human population had risen and fallen and the plague had wiped out a good portion of Europe (as disease wiped out most of the “new world”). From that time on, population increased, leading to some of the problems we face today.