As a political science major in college during the 1900’s, I was forced to sit through two survey classes in modern economic theory: Econ-101 and Econ-102. Later, as a law student, I was forced to sit through another class about corporations. Each course was taught from a Keynesian free market perspective and each propounded the conventional wisdom that laws regulating corporate greed and malfeasance were a waste of time and were in fact counterproductive, because all that was needed to keep businesses in line was the unfettered exercise of the free market.
This economic model was actually quite simple and is, not incidentally, identical to today’s Libertarian/Tea/GOP mantra. The idea is that businesses will misbehave like any other over-privileged children (read, fraud, Ponzi schemes, ripping off customers, cooking the books, tax evasion, making dangerously defective products etc.) until their misconduct simply costs too much money for them to continue. How much is too much, you say?
Economics professors love to use a fictional product called a widget to illustrate the appropriate profit-to-mayhem ratio. And so, if business-A and business-B each make widgets and business-A uses cheaper, shoddier parts, they may make more profit in the short run, but only until their shoddy widgets begin to piss off the consumer and they quit buying them. Then business-B corners the widget market and business-A is forced either to invest a bit more capital into making a better widget, or go out of business.
In the free market as applied to corporate malfeasance, if the widgets produced by business-A, are so shoddy that their use causes mass death and destruction, the resulting civil settlements may theoretically, also cause business-A to either mend their negligent, reckless, or even criminal widgets, or lose profitable market share.
Morality plays no part in this business model; so selling cars containing exploding widgets (like say, gas tanks) is just fine, right up until the point at which the resulting cost of legal settlements and lost sales revenues exceed that of the marginal profit. Then, and only them, does business-A, spend the least amount of money possible to retrofit their cars with a non-exploding widget and, (after intentionally lengthy and protracted litigation), eventually pay off a few unusually persistent grandchildren of ancestors who were burned to a cinder or disfigured beyond recognition in the various auto/widget conflagrations. And all of this is usually accomplished without any admission of corporate liability or criminality.
It always bothered me that the free market ideal was offered as a replacement for other allegedly outmoded concepts like The Golden Rule, the Social Contract, and, oh, I don’t know, a sense of decency. But I was also taught that the system was foolproof, as all businesses would eventually be forced by the free market to conduct themselves in a moral fashion, even if they did not do so out of a newfound over-abundance of altruism.
Even now, I am still wondering how long these alleged free market corrections are going to take before they actually correct the recent spate of rampant mega-abuses by U.S. mega-businesses. Years? Decades? Centuries, maybe? I was in my teens, when I was first inculcated by the smart business guys in the virtues of the free market and now I am in my 50’s and am still hearing the same old tired song and dance, this time from The U. S Chamber of Commerce and politicians on the political right.
You might recall a post I wrote on May 17, 2011, highlighting a Rolling Stone story about how Goldman Sachs bought and bundled billions in worthless sub-prime mortgages, made more billions after knowingly unloading this garbage onto unsuspecting customers, insured the poison paper to make more billions when the paper eventually proved valuable only as toxic toilet paper, and then lied to congress about the whole scheme. Oh, right, and we taxpayers were forced to bail out the big banks to cover their losses.
Now, if we apply current Keynesian/Libertarian/Tea/GOP/free market principles, you would think that Goldman Sachs must have considered the cost of their bamboozlement, insofar as it might adversely affect their profit margin and thereby force them to conform their behavior to more human standards. In retrospect, it appears that they did conduct such a cost/benefit analysis, aforethought.
In the end, government lawyers were patting themselves on the back for getting Goldman to agree to a $500 million civil settlement, but it does not take a math whiz or an economist to see that Goldman still came out $12.4 billion ahead after their brilliant, convoluted, illegal, transaction of subterfuge. Just to be clear, Goldman and Sachs broke several federal laws, bilked its own customers, bilked the insurance company, lied to congress (also a federal crime) and still made $12.4 billion, in profit. And their tiny payout penalty was agreed upon after a solely civil ceremony.
Why no criminal charges were brought against the upper management of Goldman Sachs, will ever remain a mystery; like who built Stonehenge, or what ever happen to the Anisazi, or which animal remnant sits atop The Donald’s noggin.
Just today we learned that JPMorgan also agreed to cough up a whopping $153.6 million, again in civil penalties, for their little part in the same scheme as Goldman’s, leaving them with a net profit last year of a mere $17.4 billion. To date, no criminal charges have been filed against anybody at JPMorgan either.
So somebody please explain to this aging Keynesian conscriptee, why the government did not at least force these charlatans give back all of their ill-gotten gains, if not plead guilty in criminal proceedings? If we follow Keynesian logic, the government did nothing to adversely affect the offender’s profit margins much less their continued liberty.
Instead we allowed Goldman and JPMorgan to simply quantify the pittance paid as just another cost of doing business and then pass on that cost to the rest of us, thereby permanently negating the only sanctions that might have kept them from doing it over again and over and over again.
Please remember to ask any candidate for whom you are thinking of voting, exactly when the free market is going to start kicking in and what efforts he or she will make in government to jumpstart this process. Let me know what they say and I’ll leave a note for my great, great, great, grand children.
J. Brandeis Sperandeo
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