Governmental and Economic Systems
This and the other
essays on this site meander through a number of related topics. I’ve
tried to put them in some kind of order, but
they're deeply interrelated, so please bear with me if the discussion rounds back
(Please also bear in mind that this like the other Essays was mostly written in 2000, when many of the observations expressed were much less widely recognized.)
Free Markets. “Free market” theory takes
as its starting point the idea that each person or entity is naturally
inclined to pursue her or his own best interests and is better motivated
and situated than most other persons or entities (including governments)
to figure out just how those interests can best be furthered. The
theory then says that in the mix of individuals and entities pursuing
these interests, they tend to work things out in the most efficient
manner for all. For example, most consumers will consider higher quality
and lower prices to be in their best interests, while producers generally
should want to surpass their competitors in meeting consumers’
desires while keeping their own costs as low as possible. To this
extent, free market theory makes perfect sense and is consistent with
systems theory as described in the essay on this website entitled, Cells and Systems.
Free market theory also illustrates an important attribute to be considered
in designing any system, which is that if you want the system to work
well while minimizing the need for continual maintenance or intervention,
you need to structure it so as to take into careful account
the natural character and tendencies of the people or entities (i.e.,
sub-systems) within the system, both so as to take advantage
of the benefits of those tendencies and so as to minimize situations
in which those tendencies can reasonably be predicted to cause harm.
(In this connection, see the essay on this site entitled, Cells
and Systems, regarding the concept of dharma and Plato’s
definition of justice as the state of affairs obtained when each person
or element within a system is assigned that role which it is by its
own nature best suited to perform.)
Certain adjunct conditions are necessary in order for free
markets to work properly. One is transparency: that, is, consumers
must have reasonable access to all information they might
want to take into account in making their purchasing decisions, including,
for example, information about the product including its contents,
performance, safety, methods of manufacture, etc., as well as price
and any indirect costs of the product, and also about how all such
factors compare to those of competing products. The second
necessary adjunct in order for free markets to work is consumer access
to competing products; that is, competing products must not be “squeezed
out” or made significantly less available because the seller
of the more available product has bought out its competitors,
or bought up all or most of the distribution capacity or retail shelf
space, or engaged in other anti-competitive practices.
Free Markets Are Not a Panacea. Even where transparency
and availability of competing products exist, however, unregulated free markets may not work well where individuals
or groups are insufficiently motivated or able to protect their own
interests for any of a number of reasons, including the following:
(a)The subject-matter may be too difficult or specialized for
the average individual to master to the extent needed to make the
best decision. E.g., most consumers lack the expertise required to
do their own food and drug testing; non-geeks and even many geeks
didn’t know enough about computers to realize that Macs were
sufficiently superior to PC’s that the greater expense up front
would have been more than worth the man-hours wasted in trying to
make PC’s work (among others things, Y2K would have been a complete
non-event). Another e.g., most bank depositors lack the time and expertise
to examine bank finances and practices. And personally, I find it
absurd to blame securities investors for losses they suffered through
relying on professional analysts’ advice; indeed, many if not
most people lack the ability or wherewithal even to identify a good
(b)The long-term consequences may seem too remote. Most people
tend to focus on relatively short-term effects, long-term consequences
seeming relatively “unreal”. For example, especially in
this age in which corporate leaders come and go every few years, corporations
often adopt policies that are profitable in the short run but completely
unsustainable in the long run. Other examples: the pain of property
taxes in the near-term usually seems more compelling than the prospect
of a well-educated work force fifteen or twenty years from now; and
we’re reluctant to take action to reduce pollution unless rewarded
by a tax credit or other immediate benefit to our bottom line.
irrational impulses may interfere with good decision-making. For example, the "it can’t happen to me” syndrome;
or, once something traumatically bad does happen to us, the
tendency to overestimate the risk that it will happen again or otherwise
overreact. And sellers savvy to these tendencies often deliberately
use them to manipulate us.
individuals or groups may simply lack the capacity, time, or other
leverage to fend for their own interests effectively, e.g.,
children, the mentally disabled. Or again, even if most individuals
had the intelligence and expertise needed to analyze corporate financial
statements, few people with jobs and children have anywhere near enough
time to actually perform many such analyses rather than relying on
are some areas in which, for various reasons, we just don’t
want to leave people to duke things out for themselves; e.g.,
we want the government to catch and punish criminals rather than letting
individuals take justice into their own hands, to regulate automobile
monopolies: some theorists believe there are certain “natural
monopolies,” enterprises that can be undertaken on a cost-effective
basis only as monopolies or that by nature should be subject to more
extensive governmental regulation. As I understand, this was the approach
used when the (wire) telephone system and infrastructure were first
created; Fannie Mae might be another instance. I for one wish our
government had imposed a standard in common with other countries so
my cell phone would work in Europe.
Whenever any of the foregoing circumstances prevail, regulation by
government or other agencies whose interests are aligned with those
of the people for whom protection is needed may be indispensable in
order to ensure people aren’t just sitting ducks.
be noted that regulation can be of various kinds or structures. E.g.,
meaningful disclosure of material information can be required instead
of imposing specific requirements or standards; or inspection or testing
can be imposed at critical points in the supply chain, i.e., in many
instances it can be required only at the last point before a product
reaches consumers, on the theory that retailers and middlemen will
then themselves require that suppliers up the chain provide safe products.
Another effective form of regulation is to give consumers the right
to sue for an effective remedy from miscreant or negligent suppliers
(see the discussion of tort reform in the essay entitled, "Miscellaneous
Other Systemic Issues").
As will be discussed further below, in some areas, it will be necessary
in addition to build structures into the free market system designed
to minimize potentially harmful conflicts of interest and to make
sure that checks and balances are provided by qualified agencies whose
interests are aligned with those of the constituencies they’re
intended to protect.
Just Because You’re a Capitalist Doesn’t Mean
You Can’t Be a Dictator. Many people in the U.S. seem
confused about the distinction between different economic as distinguished
from political systems. We tend to equate “democracy”
with “capitalist,” and we tend to equate “socialist”
or “communist” with “dictatorial.” These equations
are simply incorrect. There are plenty of capitalist states
governed by dictatorship, and there are plenty of socialist democracies.
For the record, theoretically, “socialism” is a stage
between capitalism and communism. Under socialism, there is a central
government whose main function is to protect people, at least some
businesses are nationalized, and the economy operates upon the principle,
“from each according to their abilities, to each according to
their work.” See http://www.etext.org/Politics/MIM/faq/commievssoc.html ; http://www.geocities.com/~johngray . Thus, as I understand, under
pure socialism, different people receive different compensation based
on the work they do; but no one would receive money merely through,
say, inheriting a lot of income-producing assets. Under “communism,”
the operating principle is, “from each according to their abilities,
to each according to their needs”; all property is owned communally,
there is complete economic cooperation, and government is to wither
away. See http://www.marxists.org/archive/marx/works/1847/11/prin-com.htm ; http://www127.pair.com/critical/soc-v-com.htm ; http://www.geocities.com/~johngray
. The extent to which either communism or socialism accords with a
realistic view of human nature is an open issue; but sincere believers
must in fairness be recognized as altruists who seek the opposite
Our confusion between economic vs. political systems, however, seems
actually to have helped lead the U.S. to support any number of dictatorial
tyrants, merely because they were opposed by communists or socialists.
U.S. leaders often seek to justify their policies as motivated by
a desire to "spread democracy," while scrutiny of their
actions and actual accomplishments suggests that their real priority
is to spread capitalism--more particularly, to open foreign markets
to big U.S. corporate enterprises.
If we don’t want to be identified by other countries as a “bad
guy,” our actions need to change to better reflect that it is
indeed democracy that we value, and not just profits. We undermine
our credibility and our effectiveness if we are seen to ally ourselves
with tyrants, regardless of their economic persuasion, or to defend
victims of aggression only when it suits our capitalist interests.
Just Because You’re Not a Government Doesn’t Mean
You Can’t Be a Dictator. I hope it will eventually
be more widely recognized more that a megacorporation or other conglomerate
can be just as much a dictator as any individual, human tyrant.
Tyranny means reducing people’s choices or freedom to choose
for unjust reasons--for reasons such as providing excessive benefits
or control to the tyrant at the expense of those tyrannized. Once
it becomes apparent that a dictatorship is not working equitably,
the dictator must use deception or force in order to maintain power.
Big (or well-financed) companies behave tyrannically to the extent
that they seek to win out over their competitors not by providing
better or cheaper products--so that a well-informed consumer would
naturally prefer those products--but rather by deceiving consumers
regarding their or their competitors’ products or by reducing
consumers’ opportunities to choose competitors’ products.
This can be accomplished in the following ways, among others: (1)
lying about their products or withholding material information about
them; (2) paying distributors or retailers to distribute or offer
the company’s own products exclusively or disproportionately
to actual consumer demand; (3) building into the company’s own
products incompatibility with other companies’ goods or services;
and (4) forcing competitors out of business by means of predatory
pricing or buy-outs.
Currently, although U.S. law prohibits flat-out deception of consumers
(whether such prohibitions are adequately enforced being another question),
it tends to look upon most other anti-competitive practices not only
as permissible but as protected “free speech.” For example,
the law ignores any rights of consumers to have access to a full range
of choices not unduly manipulated by producers trying to give their
products an edge they would not have if they had to stand on quality
and price alone.
Our founding fathers recognized that, in order to avoid re-creating
in the U.S. a tyranny similar to the one they’d just fought
the revolution to escape, they should build into our government a
system of checks and balances, so that excessive power could not be
amassed within any one branch. They did not foresee, however, the
extent to which the same danger exists in the economic sphere.
Thomas Pynchon had it right in Gravity’s Rainbow. The
world isn’t run by governments; it’s run by corporations
(which in turn run the governments, if we let them).
“Free” Markets--Freedom for Consumers, or Suppliers?
The film Before Night Falls, directed by Julian Schnabel
about the Cuban author, Reinaldo Arenas, contained a passage that
stuck with me. “People that make art are dangerous to any dictatorship.
We create beauty and beauty is the enemy. Artists are escapists. Artists
are [condemned as] 'counter-revolutionary' because there is a man [Castro] that cannot govern the terrain called beauty, so he wants
to eliminate it.” (I apologize that I don’t know whether
the line was original with the script author or was quoted from Arenas;
I found this version, unattributed, on the movie homepage, which as
of 1/26/2004 is at http://www.finelinefeatures.com/sites/bnfalls/frameset.html , but which apparently no longer contains the quotation.)
megacorporations now own most of the music, movie, book publishing
and other media businesses. They are pursuing every possible means
to eliminate the need for creativity or authenticity. They want to
be able to crank out hits according to formulae, using musicians,
actors, writers or others who can be easily replaced and are happy
to take orders, so that they won’t have to deal with unpredictable,
idiosyncratic creative talent. They want to be able to control consumers’
awareness of and access to all media, to make us want to buy what
they want to sell.
The kind of competition that’s good for consumers is the kind
that gives consumers more and better-informed choices. Free markets
should mean freedom for suppliers to choose what products they’ll
offer and at what price and freedom for consumers to choose what products
they’ll buy and at what price. Requiring accurate disclosure
of material information is a start. But it may do little good to require
a corporation to disclose the hazards or insufficiencies of its product,
if no better product can be found on most stores’ shelves because
stores make more from distributor kick-backs than they do from product
sales. Corporations that try to hinder others from offering or selling
competing products or engage in other anti-competitive practices aren’t
asking for a free market; they’re asking to be free to destroy the free market for their competitors and for consumers. There is
nothing unfair to businesses in structuring markets so as to encourage
businesses to focus on providing better products and services at lower
prices instead of on eliminating consumer choice. (Consider how businesses
react when consumer activists are allowed not just to boycott a company’s
products for no reason but to engage in practices that make it impossible
even for consumers who wanted to buy the company’s products
to do so.) I hope one day we’ll recognize that more carefully-crafted
prohibitions and enforcement against anti-competitive practices are
necessary in order to create a market that is truly free for consumers.
Anti-Trust Laws Primarily Protect Businesses, Not Consumers.
Specifically, anti-trust law focuses on whether allowing a merger
or an anti-competitive practice by or between companies would hurt
competitor companies. As far as I know, anti-trust law all
but ignores the question of whether allowing such merger or practice
might diminish the public’s access to an array of products.
The law simply assumes that the public’s interests will be indirectly
served if certain anti-competitive practices are restricted. But the
law does not prohibit monopolies per se (courts have recognized, e.g.,
that Microsoft holds a monopoly in certain areas); it only prohibits
monopolist companies from using their position to hurt competitors.
So long as a monopolist can avoid a final court judgment holding that
the monopolist acquired or used its position in a manner intended
to hurt competitors, consumers’ interests are simply of no account.
(Not to mention that winning any such judgment can take years, even
For reasons similar to the various considerations set out above, we
can and should limit excessive consolidation of the ownership of key
resources that are by their nature limited in availability (e.g., the airwaves, the internet, energy, fresh water, etc.).
Need for Transparency and Accountability. We need
to develop systems to account for all long- and short-term costs and
benefits of our decisions and indecisions, including all kinds of direct and indirect taxes, deductions, credits, and subsidies
as well as unintended side-effects or hidden costs such as depletion
of natural resources, losses due to extreme weather and other effects
of global warming, increased costs from deaths and disease due to
environmental hazards, lost man-hours due to inefficiencies such as
traffic jams, or having to spend countless hours hassling HMO’s
for payment, lost productivity due to a poorly-educated labor force,
not to mention interest expense, the effects of inflation, lost opportunity
costs, etc. A systems theory analogy would be to say that any organism
does better if it can reliably monitor and regulate its own functions;
e.g., I am probably better off if I have some insight into what I’m
eating and how much, and as how it’s likely to affect me, as
well as various other matters affecting my life functions.
Our current ways of dealing with such social cost-benefit matters
are so complex and opaque that it is extremely difficult to get a
handle on even a portion of the economic picture. In many areas, the
system is not transparent precisely because the parties interested
don’t want it to be. In some instances, such parties may be
motivated by perfectly altruistic reasons; e.g., it seems possible
to me that a portion of the increase in health care costs since 1980
is related to the AIDS epidemic, and if so, I would not be surprised
if the medical community may have preferred to avoid calling attention
to that connection, out of a desire to avoid adding fuel to anti-gay
Nonetheless, in many if not most cases, I believe the lack of transparency
results at best from mere neglect, or worse, from selfish reasons;
and I believe that on the whole, we’d be better off if transparency
and accountability were the rule rather than the exception.
Among the types of things for which better accounting is needed:
or discounted entitlements or benefits--not just programs
to help the poor, such as welfare, but also programs in which governments
give stuff to corporations for less than full market value. E.g.,
licenses to use public lands or resources, to graze animals, harvest
trees, extract oil and gas or other minerals, to use the public airwaves,
etc. As well as the distortions, if any, that arise from them.
tax deductions, exemptions, tax credits, etc., as well as
the distortions, if any, that may arise from them. People complain
about the complexity of the federal tax code. Some complexities are
“good” in that they arise from making exceptions to general
rules to try to reach results that most people agree will be more
fair--e.g., deductions for medical expenses above a certain percentage
of income. Other causes for complexities are “bad” in
that they result from pressures from special interests that most people
would not consider fair. In either case, however, these complexities
have made it more difficult for people in general to understand what’s
going on. It’s quite possible that the tax code is the best
place to address many of the concerns that give rise to complexity;
but in any event, we need better accounting to fully understand the
total, net financial effects not only of the tax code but also the
various other governmental and other programs, including
administrative costs for adequate enforcement.
costs resulting from allowing activities to proceed unregulated
and untaxed, where pollution or depletion can be expected
to result from such an activity but will probably not be paid
for by the people who profited from it.
costs or lost opportunities that result from failing to invest where
the return on the dollar is substantially more than one to one,
e.g., in child health care and education (a quick check I just made
on the internet found studies showing returns to taxpayers of from
5 to 7 and more dollars for each dollar spent in these areas; see,
e.g., http://www.ssa.uchicago.edu/publications/advforum/v3n2 ). I
believe the arts to be similarly profitable (albeit, unfortunately,
not to most artists).
having to do with wasted TIME. All business executives know
that time is money. I assume, for example, that businesses have saved
a lot of money by replacing human switchboard operators with automated
telephone menu systems. The hidden cost is that, while it may be fine
for me if people who want something from my business can be dealt
with by an automated system, it’s not so great for me when my
employees need something from someone else’s business and have
to spend more time dealing with someone else’s automated system
than if they could just talk to a human being. Overall, I suspect
the benefits of such systems outweigh burdens; but whenever I have
to deal with more than one such system per day, I imagine a giant,
phone gridlock in which every employee in the world is stuck working
their way through someone else’s automated menu instead of talking
to a human who could actually help them. Another area where I’m
sure savings are possible is health care. My employer, in its efforts
to control costs, has switched health care insurers so many times
I’ve lost count. I and my employer could not possibly be saving
in premium reductions as much money as we’ve lost as a result
of the man-hours I’ve spent trying to find doctors on the new
plans who were actually accepting new patients and then trying to
get the plans to provide the coverage they’re supposed to provide;
then there’s the time spent by doctors’ offices dealing
with the paperwork, and the fact that I’m increasingly likely
to simply defer potentially preventive health care because I simply
tire of dealing with the insurance.
To my mind, ideally, all costs we can reasonably anticipate should
be fully considered in formulating our governmental policies and accounted
for in our fiscal planning, and all such costs attributable
to any particular activity should be paid for in a way that bears
a direct and transparent relationship to such activity. For
example, whether through taxation or otherwise, the price of gasoline
should include amounts to pay not only for the full cost of producing
and delivering that product, but also for cleaning up all pollution
that results not only from such production and delivery but also from
the health care costs and lost productivity due to increased asthma,
lung disease, etc.
On the BBC
news, I recently heard of a proposal to impose a special tax on particularly
fattening foods in response to a concern that the Brits are, they
said, getting fatter and that the rise in obesity is causing significant
increases in health care costs and lost productivity. The hope is
that the tax would not only help pay for such costs but also give
people an incentive to avoid foods that make them fat in the first
place. While I can’t judge the merits of this particular proposal,
it sounds worth consideration. (I note that this approach taxes individual
consumers rather than the corporations who make or advertise fattening
foods, although if consumption is reduced, the corporations will presumably
As a corollary, it appears to me that, in imposing punishments or
penalties, the law could and should use more often than it does the
principal of restitution. The benefits are that the punishment is
more likely to be proportionate to the harm done, and those harmed
are more likely to be restored or fairly compensated.
Also, see the section headed, “Environmental Insurance”
in the essay on this site entitled, Miscellaneous Other Systemic
Better Prioritization. Better transparency and economic
accountability should facilitate better prioritization of all resources,
including not only money but also our time as citizens and family
members as well as workers. See the essay entitled, "Miscellaneous
Other Systemic Issues," under the heading, "Work Hours and
Benefits." Let me just add generally that I believe we short-change ourselves
in the long-term by failing in the near-term to invest in education,
health care, and the arts, among other things.
Rounding back to focus again on free markets . . . .
the Fox to Guard the Hen House. In analyzing the structure
of any system, it’s important to have a clear concept
of what constitutes a “conflict of interest.”
A conflict of interest exists whenever either (1) the interests or
welfare of an individual or agency conflicts in whole or part with
those of another individual or group for or over which the former
has been given responsibility or power; or (2) an individual or agency
has been given responsibility for or power over the interests or welfare
of two other individuals or groups whose interests or welfare conflict
in whole or part with one another.
For example, the U.S. Dept. of Agriculture has been given responsibility
both to protect the healthfulness and safety of agricultural products
for U.S. consumers and to assist the agricultural business. This is
a classic partial-conflict of interest situation, because there will
inevitably be occasions when agricultural businesses feel that the
costs to them of complying with regulations designed to assure that
their products are safe and of providing complete disclosure about
them are not justified by the benefits to consumers, while consumers
will feel the opposite.
Most of us have on occasion come up with some rationalization as to
why what we want really is fair or doesn’t hurt anyone else,
or at least not anyone specific. Most of us have on occasion succumbed
to temptation; and if temptation continues, chances are we’ll
Conflicts of interest are to some extent unavoidable;
every member of a family has a partial conflicts of interest with
the other family-members; we negotiate these conflicts as best we
can, usually under at least partial observation by others.
But unwatched, unchecked power confided in virtually anyone,
no matter how wise and virtuous, will almost inevitably give rise
to abuse eventually. No fox, however appealing or well-intentioned,
should be left to guard the hen house; this asks the fox to
fight a continuous battle against his own nature.
Power corrupts; absolute power corrupts absolutely. We need to know we’re being watched and that there are rules
being enforced with reasonable frequency, or we need not to be subjected
to temptation by being given power that we could use to help ourselves
at others’ expense. Otherwise, some of us can actually start
feeling like chumps for not taking advantage in the same way others
Another important concept in understanding a system is that
of “checks and balances.” This involves using the naturally conflicting interests of different individuals or groups
to try to make sure that no one individual or group acquires a degree
of power over the others that would be detrimental to the welfare
of the whole system. We usually have the ability, in structuring our
systems, to avoid or minimize such conflicts. In the examples given
above, we could create two different agencies, one responsible for
protecting consumers and the other responsible for assisting agricultural
businesses; or restrict securities firms from engaging both in advising
investors and in underwriting stocks. The natural inclinations of
the constituencies involved must be recognized and either aligned
or opposed, as appropriate. This is why the “checks and balances”
installed in the U.S. system by the “founding fathers”
are so helpful and important.
Free markets work ONLY TO THE EXTENT that they are part of
a system that keeps the powers of buyers and sellers in balance. If
that balance is lost, it must be restored through structural changes,
such as dividing responsibilities over conflicting interests, or appropriate
Too Much Regulation? Of course, it’s quite
possible to have too much regulation or too many checks and balances.
The result is some degree of gridlock, which in some situations can
be catastrophic. The checking and balancing should not be so intrusive
or obstructive that helpful or harmless activity or change are overly
impeded or without significant benefit to those sought to be protected.
(See the discussion of systems theory in the essay entitled, Cells
We need the strongest checks, however, on the most powerful
entities. Those used to be governments; now, many are corporations.
Corporations Aren’t Necessarily Evil. Some
liberals speak as if corporations per se are inherently malevolent
or evil. This misses the mark in two important respects: (1) not all
corporations run amuck; and (2) it’s not just corporations that
run amuck, but other kinds of groups or organizations can run amuck,
too--partnerships, churches and other nonprofits, clubs, committees, nations, tribes, etc.
What’s important is not so much what the type of the entity
is, but rather what kinds of external and internal checks and balances
the entity is subject to.
It’s important to understand what a corporation is. It is not
a monolith; it is an organization of individuals. One characteristic
that distinguishes corporations from some other types of entities
such as sole proprietorships and general partnerships is that the
owners of the corporation, its stockholders, and perhaps even more importantly, the corporation's managers are shielded from personal
liability beyond the amount of their investment. If the corporation
borrows money, or causes harm giving rise to a claim against the corporation,
the worst that can happen to the stockholders is that they lose the
money they spent on its stock. They lose their investment, without
being liable for any obligations of the corporation that may exceed
As a condition to this limitation of liability, the stockholders are
not allowed to participate in the day-to-day management of the corporation.
Rather, the corporation is run by managers, its officers. The senior
officers are hired, fired, and overseen by the board of directors
of the corporation. The directors are also charged with overseeing
the corporation’s “big picture” financial condition,
direction, and policies. The directors are elected by the stockholders;
so although stockholders have no direct control over the conduct of
the corporation, in theory they have indirect control through their
election of the board.
In practice, however, stockholders have little or no meaningful input
into how publicly-traded corporations are managed. The directors are
usually selected by management. Only very rarely, when an unusually
large stockholder or consortium of stockholders make extraordinary
efforts, are they able to have any significant influence on the selection
of directors. Also, generally, directors and officers are also shielded
from or indemnified by the corporation for any liability.
The purpose of limiting the risks for stockholders, directors, and
officers is to encourage investment, enterprise, and innovation. However,
the way in which the limitations on liability are currently structured
does little to distinguish between enterprise and innovation for the
purpose of providing better products or services or improving company
efficiency, on the one hand, and enterprise and innovation for the
purpose of deceiving customers or investors, or other misconduct, on the other hand.
The “bad guys” are not the corporations per se; the bad
guys are individuals--usually managers. But the structure of corporations
as prescribed under current law includes few meaningful checks on
the power of corporate managers, too many temptations and opportunities
for bad individuals.
Again, I’m encouraged that these issues have received increased
attention since I began writing these essays; but, so far, the remedies
adopted seem patently inadequate.
It seems to me that a lot of the problems of corporate misconduct
arise in part because of the following factors:
management has no long-term commitment to the corporation
or its shareholders, and therefore has no incentive to be concerned
with their long-term welfare. Stock options were supposed to help
give management an interest in the welfare of stockholders and the
corporation, but options don’t work if the prices and terms
of exercise can be changed at the will of management, as has often
been the case. And unless very carefully structured, options are ineffective
to give management an interest in the longer-term welfare of the corporation.
management is not subject to effective oversight. So long
as management selects the directors, it’s like a fox who gets
to select who will oversee him in his guarding of the hen house: the
fox is unlikely to select a chicken or chicken-owner as the fox’s
crime remains profitable. My impression is that senior managers
involved in wrongdoing rarely pay much for their misdeeds. What’s
a million-dollar fine if the culprit’s stashed much more in
off-shore accounts? Full restitution to all those defrauded or harmed
should be required, or at the very minimum, forfeiture by the wrongdoer
of all ill-gotten gains. And why shouldn’t part of the wrongdoer’s
future income remain subject to garnishment until restitution has
One effect of the current push toward greater privatization of formerly public resources and functions is that, more and more, our once relatively robust governmental democracy is, bit by bit, being replaced with the much weaker variety of corporate democracy.
Better disclosure, without more, is not a panacea, although it can’t
hurt. But federal law already requires publicly-traded corporations
to make substantial disclosure in the forms of annual and quarterly
financial reports and other filings. This information is often so
voluminous and technical that most people don’t have time to
read it or can’t understand it; even professional analysts can
have difficulty deciphering it (viz. Enron); indeed, those making the disclosure often have every incentive to make the info as difficult to decipher as possible.
The law already includes the very helpful concept of “materiality.”
Information about a corporation is “material,” and should
be disclosed, if an average investor would consider such information
important in deciding whether to buy or sell stock in the corporation
or in deciding how to vote her or his shares (see Black’s
Law Dictionary (5th ed.), citing List v. Fashion Park, Inc.,
340 F.2d 457 (C.A.N.Y.), Gilbert v. Nixon, 429 F.2d 348 (C.A.
Kan.), and TSC Industries, Inc. v. Northway, Inc., 426 U.S.
438. What the law needs is another ingenious concept to make it possible
to require corporations to boil their information down to a volume
that’s manageable by the average stockholder yet still contains
the most important points. The “long version” should also
be provided, but it should also be possible to provide a meaningful
“short version” for non-experts. But even that won’t
solve all the problems.
It also seems clear that the same investment firms or conglomerates
should not be engaged in both advising investors or managing their
investments and underwriting investment securities, and that
the same accounting firms should not be engaged in both preparing
audits of companies for the benefit of investors and doing consulting
work for the same companies. E.g., senior corporate management and
corporate underwriters, accountants, and attorneys have good reason
to love mergers, acquisitions, spin-offs, and other large transactions--whether
or not they benefit shareholders--because such transactions are so
large that even astronomical compensation packages and fees remain
a small enough percentage of the total transaction size that they
tend to escape scrutiny.
It’s not primarily about making foxes take
ethics courses or getting chickens to analyze statements prepared
by foxes. It’s about structuring the system so as to provide
effective oversight of and enforcement against the fox by one or more constituents
naturally motivated and qualified to protect the chickens. To
fail to provide such oversight and enforcement amounts to a continuing
invitation to abuse on the part of foxes. We should
perhaps even consider whether we are in some sense partly to blame
for the corruption of those who succumb to temptations that we could
and arguably should eliminate.
Free Trade. I see nothing wrong with corporations
going global if their operations are efficient and fair. Whatever
trade barriers we put up, sooner or later, pent-up demand or supply
will leak or burst through. Currently, inequalities in work pay, benefits,
and conditions are resulting in the loss of U.S. jobs to poorer nations,
and that trend will continue at a slower or faster pace until such
inequalities ease. This will be a very good thing for the poorest
people on this planet and should ultimately result in more overseas
consumers of U.S. products. In any event, however, we’ll be
better off if we accept the changes that will come sooner or later
and start trying to figure out how to minimize the pain on all sides
(including how to protect the poor from exploitation to the extent
that can be cone without actually depriving them of the jobs they
need). What concerns me is not so much globalization per se as practices
that actually reduce competition or that are unfair or wasteful.
Yet another important aspect is scale. As mentioned in Cells and Systems, it seems likely that aspects of systems theory could
shed light with respect to the appropriate level or scale at which
various functions might best be performed. For example, when
we determine the levels--e.g., national, state, and/or local--at which decision-making or funding with respect to
any particular function should be handled--e.g., education, environmental regulation, stock market regulation,
reproductive rights, or whatever--the decision should not be based
blindly on mantras relating to states’ rights or presumed economies of scale,
but upon specifiable reasons having to do with where that particular function
might naturally be better performed.
Moreover, it seems to me that as any organization grows larger--be it a corporation, government, church or other nonprofit, union, or whatever--transparency and accountability tend to deteriorate. The distance between senior management at the top and the rank-and-file along the bottom increases, and there are more layers in between. At best, management at the top can lose touch with what's happening on the ground; at worst, those at the top are tempted to exploit the relative opacity or otherwise abuse their power, or the organization may become more vulnerable to being hijacked by sociopaths.
In order for the organization to continue to thrive, it must evolve more sophisticated and efficient systems for circulating critical information, including systems to gather, select, and deliver appropriate subsets of info to particular constituents reasonably well-suited to put it to constructive use. For example, it would be essential that the system should have ways to detect when any constituent--especially top management--might be defrauding the organization, and to timely deliver the relevant info to other constituents with the ability to investigate and prosecute such misconduct. One could postulate a view of the U.S. in which its decline has resulted partly due to the failure of its information circulatory systems--in particular, its self-investigatory agencies and news media--to evolve at a pace commensurate with the growth in its population and economy--at least, until the advent of the internet.
The Media as the “Fourth Estate”; Consolidation
of Ownership. Thomas Jefferson is sometimes credited with
having said, “[a]n informed citizenry is the bulwark
of a democracy . . . .” An informed citizenry is possible,
however, only if the news media fulfill their role as the “watchdog
of democracy”--that is, we need the media to report to us on
how well the three branches of our government are serving our interests,
among other things. The media’s role is so important
that, in my view, it could almost be regarded as a fourth branch of
government, or at least an indispensable adjunct to it. And
the media cannot fulfill this role properly if they are rife with
conflicts of interest (see discussion of conflicts of interest, above).
During the last few decades, ownership of the news media has become
increasingly consolidated into the hands of a few megacorporations
whose primary motivation is profit, not only from their media enterprises
but also from their other businesses unrelated to journalism. Moreover,
much or most of the media companies’ profits come from not from
the public they supposedly serve but from corporate advertisers.
According to Robert W. McChesney in an article published in March,
2001 (Monthly Review, http://www.monthlyreview.org/301rwm.htm as of January 27, 2004),
few industries has the level of concentration been as stunning as
in media. In
short order, the global media market has come to be dominated
by seven multinational corporations: Disney, AOL-Time Warner,
Sony, News Corporation [owner of the Fox television network],
Viacom, Vivendi, and Bertelsmann. None of these companies
existed in their present form as media companies as recently as fifteen
years ago; today nearly all of them will rank among the largest 300 non-financial
firms in the world for 2001. . . . Between them, these seven companies
own the major U.S. film studios; all but one of the U.S. television
networks; the few companies that control 80-85 percent of the global music
market; the preponderance of satellite broadcasting worldwide; a significant
percentage of book publishing and commercial magazine publishing;
all or part of most of the commercial cable TV channels in the U.S. and
worldwide; a significant portion of European terrestrial (traditional over-the-air)
television; and on and on . . . .”
See also Granville Williams of Britain's Campaign for Press and Broadcasting
Freedom, at http://www.mediachannel.org/ownership/granville.shtml as of January 27, 2004 (emphasis supplied). And this was before
the adoption ca. June, 2003 of the new FCC rules allowing even greater
Those journalists and editors employed in the media have for many
years now been working under these conditions of increasing consolidation
in corporate hands. Surely, those media employees who have survived
or chosen to remain in the business are those who found the atmosphere
relatively conducive, while at least some of those who left--who may
have been more inclined to take stands against their bosses’
interests--found the atmosphere less conducive. I don’t see
how anyone who’s worked for others can deny that one
usually tends to do better in situations in which one finds oneself
more often than not in agreement with one’s boss. Moreover,
there are many known instances in which reporters have been subjected
to explicit instructions to censor or re-direct their coverage in
order to further their employers’ interests.
More voices are better than fewer. No matter how
smart, knowledgeable, and well-intentioned anyone may be, more heads
still tend to do better than fewer; see the essay entitled, “What
Can We Know?” regarding the role of corroboration in reaching
better approximations of the truth. We cannot afford to let anyone,
however well-intentioned, monopolize the means for disseminating information.
Our news media are so essential to democracy that they should perhaps
be regarded as equivalent to a fourth arm of government. Certainly,
we should structure this part of our system to assure that the news
media do not become overly consolidated and that they operate independently
of businesses or others whose interests directly conflict with the
public’s need for information.
Anti-trust laws do not provide adequate limits
on the consolidation of media ownership. As suggested above, such laws focus on protecting business interests
and “commerce,” not on protecting the public’s access
to the widest possible range of products, that is, in this instance,
information and opinion. Anti-trust law does not prohibit monopolies;
it only prohibits them from using their position to
hurt competitors. So long as a monopolist can avoid a final court
order that it’s acquired or used its position in a manner intended
to hurt competitors, the public’s interest in a wide array of
information is simply of no account.
The Internet is a wonderful though imperfect antidote
to media consolidation. Valuable gains could be made through greatly
enhanced communication and flow of information, collaborations by
individuals widely separated by distance but with closely aligned
Among other concerns, however, we are dependent upon ISP’s,
web hosts, search engines, filters, or other agencies to identify
and access information. Some countries censor site content. The U.S.
government now has extraordinary power to eavesdrop on our internet
communications. Web hosts in the U.S. have completely disabled thousands
of innocent websites in response to government requests aimed at one
“guilty” site hosted by the Web host. And many
search engines prioritize search results to favor searches willing
to pay rather than to favor those sites most relevant to the searcher’s
Remembering the “checks and balances” concept, I think we need a capable, non-governmental, non-profit agency to
protect our interests as internet consumers, to monitor efforts
by governments, corporations, or others to restrict, interfere with,
or “eavesdrop” on internet content, access, or communications,
to make sure that information and access are not disrupted or distorted
because of objections to political or other content or as a result
of commercial pressures.
Another concern with respect to information on the internet is the
need for citations of authority, a standard practice in scholarly
hard copy publications that I believe will soon be better recognized
and appreciated among internet users. Citations should always include
author, publication or internet address, and date. (I apologize abjectly
that these essays do not meet this standard; however, in any new material
I add, I hope to do better. And if you happen to be aware of proper
authority either for or against any assertion set out in this site,
I’d appreciate your sending it to me by clicking on “E-Mail
Me” on the C-Cyte Contents page.)
Specific Journalistic Practices. Many journalists
seem to operate as if their highest goal is merely to accurately repeat
what they’re told by others. While this concern for accurate
quotation is commendable as far as it goes, personally, I want more.
And I don’t just mean that I want journalists to also accurately
repeat what an opposing authority has to say on the same topic. I
want journalists to actually try to verify more of the facts for themselves.
I realize that, as a practical matter, this may often be impossible.
Few journalistic enterprises are staffed sufficiently
to allow extensive investigation. But I am convinced it could be done
more often than it is now. For example, when a politician
makes an inaccurate statement about her or his own past performance
or position, if the matter is of any consequence and is one of public
record, I think it is of utmost importance that the media identify
and point out the discrepancy.
A less ambitious but very helpful goal for the news media would be,
with respect to political campaigns, to try to devote at least fifty
percent of their coverage to the actual positions and records of the
candidates rather than the “horse-race” aspects. (All
of this might, of course, require journalists to spend more time in
the library, but that might actually be less expensive than dragging
crews and equipment to more congenial destinations.)
The Myth of the Liberal Media. I am relieved and
encouraged that this issue has received increasing attention since
I began writing these essays. I have believed for some time that the
media are biased--but that the bias is conservative, not liberal.
If a majority of the media still vote Democrat, does that really mean
much more than that conservative forces have succeeded in shifting
the entire political spectrum to the right? For there seems to be
general agreement that most of the positions of a ‘nineties
Democrat fall to the right of those of a ‘sixties Republican.
Who popularized the term, the “excesses of the ‘sixties”?
The end of the war and the progress against discrimination that resulted
from demonstrations by liberal activists in the ‘sixties were
triumphs for humanity. The Viet Nam war, Nixon’s criminal attack
on the integrity of our elective democracy, a.k.a. Watergate, the
assassination of Martin Luther King--those were excesses.
The really regrettable excesses of the ‘sixties were not liberal,
but conservative; yet the phrase as used implies that the liberalism
of that era should be thought of with regret if not horror.
Who made “liberal” and “feminist” dirty words?
Who picked the word, Iran-Contra “affair”? An “affair”
is what Clinton had. The fact that Nixon, Bush, Sr., and Clinton may
all have lied about what they did does not wipe out the fact that
Nixon and Bush, Sr. betrayed their duties to their country, while
Clinton betrayed his wife.
Granted, the phrases and labels may have been invented by conservative
spinners, not the media; but the media has the power to decline to
use those that, however catchy, seem to distort the facts.
Why did we entrap Clinton into and then seek to impeach him for lying
about a blow-job, while the committee proposing the impeachment of
Nixon considered his tax fraud and perjury about it insufficient bases
for impeachment (see http://www.house.gov/sherman/press/oe990119text.htm ), and the word was scarcely breathed against Bush, Sr., even after
compelling evidence that he’d lied to hide his role in the Iran-Contra
affair, in which federal law was secretly flouted? (See http://slate.msn.com/id/12441 and http://www.businessweek.com/1997/25/b353254.htm . (Maybe it’s
time to distinguish degrees of culpability for cover-ups or perjury
based on the degree of culpability of the underlying act. E.g., if
Clinton snuck in hamburgers while he was supposedly dieting and then
lied about it, should that really be viewed as equivalent to lying
about breaking laws relating to matters state?) Why did we demand
apology after apology from Clinton, while Jimmy Carter was ridiculed
as a prude for confiding that he sometimes lusted for women other
than his wife? Why is it that only on the BBC news did I hear the
report based on federal records first released in 2001 that President
Ford gave advance approval to Indonesia’s invasion of East Timor?
I don’t really expect to change the mind of anyone inclined
to disagree with me either about the underlying issues or the way
they’ve been reported by the media; but I do want to say that
there seems to me to be plenty of evidence that if there is a general
bias in the media, it is not liberal.
I have not read Eric Alterman's book, What Liberal Media?,
but I suspect he covers this ground well. See also, e.g., http://www.globalissues.org/HumanRights/Media/USA.asp ; http://www.mediachannel.org/originals/election.shtml .
(Proceed to next Essay, Miscellaneous Other Systemic Issues, or . . .