Subject: Economic Prosperity and Law...

(Tuesday, April, 2009)

(approx. 4795 words, 9 pp.)

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From Plato’s Republic, to Aristotle’s Politics, to Cicero’s Republic, and Adam Smith’s Wealth of Nations, Western man has asked the question, What is the Just Republic, and how does it relate to the morally virtuous and truly fulfilled life of the individual and to the wealth, health, and overall prosperity of the nation? Following what appears to be, now, an inevitable worldwide economic meltdown in 2008, it is time once again to raise these time-honored questions of mankind on earth. What are the same lessons learned, yet again, in this our day? The seeds were laid for this latest collapse in the 1960s with an overall or general social/ cultural shift to a morally relative humanism, which is a foolish sand upon which no society, individual life or economy can be built. Once again, this is the lesson learned, but the dynamic of setting up "a just republic" or "commonwealth" with liberty and justice for all is a much greater question, yet to be answered in the long story of mankind on earth...

Playing out in History...

We are getting closer to being able to do substantial, true economic theory, and to see how this is going to play out not just theoretically or philosophically but in history. However, first a little more philosophical underpinning...

So, in the mid-19th century, who are Marx-and-Engels and even arguably John Stuart Mill shooting at to take down? John Locke and the American founders with their real natural moral law and real rights, economic and otherwise. And Marx-and-Engels and John Stuart Mill are unloading with everything they have. Marx-and-Engels are after private property, of course, and the very idea of property and real abstract concepts and, hence, even intentionality. [this was developed at length in the recent "Kingdom come" essays] For his part, Mill is more after traditional morality and rights and even traditional notions of real truth. (Again, unless someone is physically harmed, nothing is supposedly "wrong," such as, say, supposed so-called "victimless crimes" of drugs and prostitution.) Locke, genius he was, believed, of course, in abstract truth as well as material facts (no big deal for Locke but this is a very big deal for modern philosophy!), and by implication so is intentionality (that is, reasons as causes). However, when Hume follows Locke, he is usually thought to build on Locke’s work (a common historical revisionism), but in fact Hume attempted a repudiation of almost all of Locke’s work, or at least much of the central features of it!

For Hume, all but material or, that is, empirical facts had to go! Hume has no abstract truth at all, and it is the very point of his theory, no less. Locke not only has abstract truth, but says this is the difficulty with understanding language, which is true, and ultimately it raises all the questions of Plato and the Greeks, that is, what is real abstract truth? In any case, for Hume (as for humanists since antiquity) "morality" is only my gain or interest (Hume’s actual definition) and it is the opposite meaning of the word since Socrates, for the non-humanist (such as Locke)!

Bentham adds pleasures and pains to Hume's material facts and off to the races these British thinkers go culminating in Mill (Hume is specifically Scottish, actually). And among intellectual groups these anti-traditional morality, anti-natural law and rights thinkers are going to take Locke and the American founders down, and they are going to take them down hard, by relegating Locke and the American founders to the trash bin of history. When the humanists take over the schools in the late 19th and early 20th centuries out go virtually all traditional thinkers from Socrates to Cicero to Locke and the American founders. Not pretty, we can say in retrospect, but true, and we need to deal with reality of course.

And this is just the beginning of sorrows in the late 19th century. If there is no real (natural) moral order, and there is no real or valid concept of property, and there is no real or valid concept of justice, then all that is left for the basis of law in terms of legislation and for law in terms of legal theory or jurisprudence is interest groups seeking advantage over each other in legislation, and all that is left for theories of jurisprudence in law schools is legal positivism, that is, if the state says it or the court rules it, it is by definition good, because there is no real (abstract/ metaphysical) good or justice to which human law and rulings are supposed to correspond, which Cicero and Jefferson argue as the central feature of their theories.

This "interest groups only" is theoretically, virtually, a definition of the City of Man in Augustine, and legal positivism (or might is right) is almost a definition of tyranny, no less. By definition, good ole King George can do no wrong, and Jefferson’s Declaration is necessarily ultimately almost meaningless gibberish! You will note that the Christian worldview easily maintains traditional notions of rights and morality, but the humanists do not accept the natural moral law or order nor the Special Revelation of the Bible of course. We are getting a bit far afield, but these things are related to and at times foundational to economic theory because you cannot even start to do economic theory without a valid and real notion of property (metaphysically speaking) and, hence, of justice (ontologically speaking, that is, justice really "exists"). For example, it is really unjust to wrongly deny people of their property.  But economic theory, as such, is most specifically about how markets work and how capital (or money) works.

As my dear father used to say to me, "Money is worth something" or actually the point is "The use of money is worth something." This is just a basic truth of economics and of life, and it is in many ways the foundation of capitalism. My father was a banker, and what do bankers do? They lend people money! Centuries ago, and in ancient times, lending people money and charging interest was called "usury". Why? Because you were letting people "use" your money, and interest was a payment for the use of it. Not complicated, Economics 101, or at least it used to be (before we invented bad paper and faulty derivatives)! In any case, the idea of capitalism is you borrow money for a business activity, and you then "use" it to make more money than you are paying in interest. Very simple, very basic.

On borrowing and investing...

There are essentially 2 primary ways you can get money for a business (apart from government grants, I suppose), and they are loans, as just described in the process of borrowing at interest and the other is, in essence, venture capital, which is not a loan but buying in for a piece of the action or part ownership, and that is radically different than a loan, clearly, but both are equally capitalistic (I would say).

Two points are in order here: 1.) The communist as an anti-capitalist was just flat wrong and in virtual denial about a virtually self-evident and undeniable fact, namely, "The use of money is worth something." This just cannot be denied, and the truth of it is as old as man. Get real. (The Bible tends to prohibit usury, of course, but this generally is not thought to be for investment capital but in taking advantage of someone’s need in consumption) And 2.) The second point is the communist as an anti-capitalist just misses the point that ownership, management, and venture capital are all a real part of the finished product whose value cannot be determined simply by the amount of labor that goes into producing it. Labor and materials are only two parts of the cost of making a product.

In short, if you buy stock in a company, you are not lending them money! You are a part owner, no less. And, if the company is successful, it actually makes a profit! And you should, therefore, get a return on your investment, when and if the company is profitable! This is only "just," my friend. All of this is traditional investment economics, that is, before we turned the stock market into a highly leveraged gambling casino?

We have become so supposedly smart and advanced with complicated derivatives and massive leveraged hedge funds that we have almost completely lost sight of the basics of economics and the very function that markets and capital are supposed to play in a society, in favor of an ideological commitment to unregulated speculation based on misguided notions of markets and capital. We are increasingly not dealing with the most simple basics of the purposes of markets and capital for the good society, wealth of nations, and the just Republic, and this is one of the messages, if not the message, of 2008?

To get our minds on track and to break us in early my father gave my sister and me, as young children, some shares of stock in the bank where he worked! We looked at the certificates, mere pieces of paper with nice pictures on them, and it meant about as much to us as it would to Karl Marx! And my father then said, "Now you are part owner in the First National Bank where I work." But it still was not registering with us. I was about 5 or 6, and my sister was 8 or 9. Ownership, piece of paper, and a big building downtown, we just couldn’t connect all those dots. So he said, "You do not own the whole bank, just a little, little part of it." In our minds he was talking about merely the building where he worked, so my sister then had a eureka experience and says, "If I own just a small part of the whole bank building, I want to own Daddy’s desk."

It could be a new stock certificate: "10 shares, Daddy’s desk"!  Obviously as an 8 year old she still did not have the "ownership" and "stock" thing down completely, but she was at least heading in the right direction, which is more than we have been doing as Baby Boom children these past 3 or 4 decades? She actually winds up as a young adult with a Harvard MBA, no less, and I am sitting here writing basic economic theory, so clearly my father's efforts were not in vain!  The point is the basics are pretty simple and even a child can understand them, almost anyway, even if our financial wizards in Washington DC and New York cannot?

The fact is the basic ideas of capital, interest, and property ("mine," even for a 3 year old!) are very straightforward, the hard-core humanist, notwithstanding. And markets, desirable free exchange, and even justice are also fairly straightforward ideas, but in truth as things like markets, desirable free exchange, and justice play themselves out in the real world, the concepts and their application become increasingly more complicated. And probably the concept we have the most trouble with is "justice," for a variety of reasons. Perhaps, the most common definition of justice is fairness.

Is "fairness" a good definition of "justice"? Yes, it can be at times, but it is fraught with problems as a definition (as Cicero says), and it tends as much as anything to beg the question, namely, "What is ‘fairness,’ really?" I think fairness is a good and appropriate word for justice, but in contrast to "justice" people’s idea of "fairness" tends to vary widely as Cicero points out (almost Lady Justice with the blindfold removed?) whereas justice usually has a more clear-cut, impartial objective connotation. And as Cicero points out the slippery or the highly intuitive idea of fairness is subject to demagogue exploitation by unscrupulous politicians.

There are various more specific definitions of justice beyond fairness. Plato, Cicero, and Paul like the idea of justice as the harmonious interaction of the parts of the Body. For Aristotle it is more to treating equals equally or what we would call impartiality, but this tends to be more an aspect of justice than justice itself. In the end justice is pretty much getting what you deserve, though in Plato this idea is rejected in the area of personal morality as creating an undesirable running score card in undermining personal relationships in a way that the Golden Rule, for example, would not, namely, always treating others as you would wish to be treated, regardless.

Brother Adrian used to say, "Justice is getting what you deserve, mercy is not getting what you deserve, and grace is getting what you do not deserve!" Is this true? Yes, I think so, but the truly complicated questions of social and political theory as well as of economics tend to be in the (at times) complex relationship between markets and justice. And this is where things get very interesting.

The relationship between markets and justice...

The relationship between markets and justice is where so many problems and misconceptions arise for the utopian Liberal as well as for the laissez faire Libertarian but for radically different reasons, and in truth there are problems here that are quite real, and this is how and why the whole question arises of the necessity of wisdom and reason for good and just legislation and regulation for those times when markets fail to achieve a just or legitimate ends as part of a harmonious body! (Let’s not forget the end goal, please!) In any case, how does the utopian Liberal go wrong in thinking about "justice"? Classically he calls for so-called "social justice." He means by that some people have more than others, and that is inherently unfair or unjust for him, and he wants things like wealth redistribution with an underlying egalitarian assumption as "justice." However, in truth, egalitarianism is almost the opposite of what is meant by "justice." Not everybody deserves the same, not every function in the society is the same, and not everybody does their function equally well, whatever it may be, and so on.

On the other hand, there may be a place for progressive income tax, for example, but the argument is probably best made in terms of the possible overall well being of the society or commonwealth. The goal of the just society is to be based upon, or regulated by, Reason for the ends of overall societal wealth in desirable commerce, exchange, etc. as well as having whatever differences being to the benefit all. Famously John Rawls outlines this as saying if you are going to be thrown into a society not knowing what place or station you would have, how would you want it (the society and economy) set up? I think Rawls has hit the bulls-eye here, but he is not very popular with the utopian egalitarian who cannot escape his mindless "compassion" and "equality" and even "resentment." On the other hand, Rawls is even less popular, almost anathema, with the laissez faire Libertarian. Why is this?

The laissez faire Libertarian has an ideological and excessive, and really self-destructive commitment to market forces, and even imagined market forces. Why is this? Because there tends to be, in fact, real justice in market forces, but market forces simply driven by mere amoral self-interest individuals and groups tend to self-destruct not only the individuals practicing it but ultimately the entire society economically. Again, Adam Smith’s Invisible Hand for the wealth of nations in capitalist interaction tends to work well over the long haul only with mutual self-interest or, in essence, moral self-interest, which in reality is not pure self-interest or advantage at all, in fact virtually its opposite. The point here is markets certainly tend to produce justice (and fair prices), but they are not a cure-all, and an excessive or ideological commitment to unregulated markets and to pure self-interest is not healthy or desirable for the society or individuals in it, and it tends even to self-destruct the society over time as we have seen in 1929 and 2008.

Still, the question we are considering here is why do markets tend to produce justice, and in fact prosperity for all? And the answer is as old as mankind, and it is known as the "just price theory" in having a willing buyer and a willing seller, and if someone is selling something (a good or service) at too high a price (that is, unjust price!) someone else will come in and undercut them. What is something worth? Immediately, it is worth what someone is willing to pay for it, but in truth, value, of course, is more complicated than that, and there are also practical complications. "Necessity drives a bad bargain" as an old adage goes, and creates something of a coerced buyer, but let’s not digress. The point here is very simple, basic, and true, but it does not, or should not, lead to an ideological commitment to laissez faire capitalism (that is, complete non-regulation as the ideal and not well-regulated as the goal).

Everyone understands that markets tend to self-regulate, but this should not lead to an ideological wholesale commitment to laissez faire capitalism or unregulated markets. The argument of laissez-faire Libertarian prior to 2008 was that the massively leveraged hedge fund banks will collapse if they are not based on sound economic activity, and that is true, and they did, but when they went down they tended to take the whole economy with them, and then we needed seemingly endless government bailouts and on and on. The operation was a success but the patient died. In this case, the market worked in self-regulating the poorly run financial institutions, but the economy died! Historically, and after 1929 (if I am not mistaken), we were highly conscious of this and set up a framework for financial institutions to operate in, and then let the free market work within that framework or, that is "regulation," hence it was not a pure free market, at all, but a regulated free market, and it is often said we ended those seemingly very wise post-1929 regulations some few years prior to the 2008 collapse, with predictable results?

Traditionally, we had Savings and Loans, commercial banks, brokerages houses, insurance companies, and so forth, and they were chartered to do specific stuff, and so "compete" with each other in a given framework of good rules, etc., this is not complicated (and it made almost none "too big to fail"?). And there was even regulation within these different sectors. In any case, the purpose of government is not to stop business and commerce but to set up a structure that allows it to work most productively, openly, and beneficially for the whole society. To "Promote the general welfare," as the Constitution says.

Creating good rules and regulations (that is, laws) entails wisdom, reason, transparency, impartiality, good faith participation, etc., but the laissez-faire capitalist has lost track of much if not almost all of this, even in theory, no less. And this is apart from special interest groups pressuring legislators for special exemptions for taxes or regulation, etc. It is free commerce within the rules of the game, wisely constructed, which makes the commerce or system work better and be more productive for the whole society, and more stable. Unregulated individualism (of the libertarian Republicans) and special interest politics (of the liberal Democrats) are both humanistic anti-body models and miss this point entirely of "free commerce within the rules of the game, wisely constructed" as the point of government legislation, regulation and law.

The Libertarian, or that is, laissez-faire capitalist, makes the mistake of thinking that just because a transaction or deal or contract has been made that it is necessarily market-driven, and hence it is necessarily just or fair. Or, he tends to think all is a matter of government intervention or prohibition, or nothing at all. It is true that markets tend to create a just price, but that does not mean that "no regulation" is the ideal, and it does not mean that every deal or transaction made between two parties is actually market driven, let alone just. Thinking that everything is market driven and that everything that is market driven is necessarily just is one faulty ideological fallacy on top of another. One of the areas where this combination of fallacies is often seen is in the controversies surrounding executive pay. One famous example (among many which were in the news over the past 20 years) was some head of the New York Stock Exchange and his unprecedented 100 million dollar plus salary or some such figure (as I recall writing this).

I forget the details and for the point here they are not that relevant because all of these stories tend to have the same story line. The Libertarian holds that any salary that any executive negotiates is necessarily a just salary/ price, since it was negotiated at some point between two parties, and this would cover all of the so-called golden parachutes for executives in the 10s of millions of dollars with severance pay for completely failing companies, let alone successful ones! The Liberal, by contrast, tends to say these executives are making too much money, whether the company is successful or not, and the government should intervene. The Libertarian then says it is not the government’s role to set executive pay, and the battle lines are drawn between the two extreme positions, and though, as usual, there is some truth to both the Liberal and Libertarian positions, but both positions are wrong, in my opinion.

The story that came out about the Stock Exchange guy reveals the problem (as I read it in the newspaper), and I think it is the same everywhere, or in most cases, or again some variation on it. His salary was set or "negotiated" with a committee of the Exchange, as it often is in large private organizations and corporations. In the news (for what it is worth) it was reported that in the Stock Exchange case, the guy had even appointed some of the so-called "executive compensation committee" people himself, but whether that is the case or not, the market (fair price/ pay) system between the committee and the executive, whoever it may be, is (and was in that case) simply broken, clearly. The Libertarian is wrong! The market is not working here just because a deal or salary has been negotiated between two parties.

The government intervention that is necessary is not to set the salary (as the foolish Liberal holds), but to change the ground rules for establishing a publicly traded company or corporation, etc., and the reason why this is the case is not simply fairness, justice, or the general public good, though these may have some relevance, rather it is to protect the dang shareholders (the owners!) who are potentially getting screwed by their own executives and their cronies! I heard of a case once where all the executives were given across the board raises when the company was in a tailspin, and a TV stock analyst said it did not seem wise or right, but that was a matter for the shareholders! True, it should be, but the point is it wasn’t because the shareholders have no say in the matter in reality to speak of! The market is not working here because the system of incorporation set by the government allows for excessive cronyism among the executives, who are actually employees of the share owners. (Please.)

The CEO is not really the problem and it is not market driven

The Libertarian tries to justify what seems to causal observation to be excessively high executive pay (even in totally failing corporations) by saying it is market driven, when in fact it is more a matter of "social convention," and social convention specifically without "market forces/ prices"! (President Obama is completely correct on this point. Something of a rarity?) I, personally, was going to invest in a company once but become very wary when I saw one executive made $750,000 doing "community relations" or some such thing. I thought to myself you can do a lot of "community relating" for that much money! But it is much worse and more complicated than this and false markets.

It does not matter if one does CEO or executive pay generally, it tends to be many, many times that of the average worker in the USA, and it is far few times than the average worker, in say, Japan. All I know is what I read in the newspapers! But this 50 times the average worker salary for the top dog (or similar figures) is not even true historically for America, no less. So, it is not market driven in either case! Maybe this is good and maybe it is bad, but it is not market driven. The top dog business executives in this region of the country that I knew of as a youth when I was growing up in the 1960s and early 70s were making not even 10 times the average worker’s pay, it was said in those days, and I assume that was so. I personally just have some anecdotal knowledge of this, but the truth is the figures are somewhat commonplace in the news.

Pity the poor shareholders! Get real!

Executive pay across the board today in the same companies has radically changed over the last 30 or 40 years far beyond mere inflation, rightly or wrongly. The point is the whole thing is more a matter of "social convention" than markets (again, I agree with the President on this rather obvious fact), as well as what one can get away with under rules of incorporation. If executive salaries were actually "market driven" in 1970, then they were not in 2007, and vice versa, for good or ill. This is all consistent with what you read in the papers; executives used to make 4 or 5 or maybe even 6 or 7 or even 10 times what the average employee did, but today (especially with bonuses and stock options and so forth) it is said to be 50, 60, 70 or more times the average employee.. And even when the company goes bad, nobody takes a pay cut, even symbolically, nor is it demanded by the compensation committees, and the shareholders have little or no say, as best I can tell! (In fact even large mutual funds with a great deal of skin in the game complain about this system for obvious reasons, but to no avail?)

I do not claim to know what executives pay should be in relationship to profits or average employee pay, but right now we do not have a real market system nor rational rule of thumb to make this work justly and desirably for the executives, the company, or the good of the overall system, let alone shareholders! Pity the poor shareholders, at least in 1929 and 2008! But this is not simply a matter of "executive pay"! I am all for everybody making as much as they can! But frequently this stuff is not market-driven, and you are kidding yourself (or doing mere theoretical work for the Wall Street Journal?) if you think it is! For example, why do lawyers almost always get 30%? Is this market driven or written in the clouds? Hardly! Get real! Maybe special interest group lawyers write the rules? (Just a thought.)

So many examples, so little time

So many examples, so little time. So join us again next time...