The Predator State
Enron, Tyco, WorldCom... and the U.S. government?
By James K. Galbraith
-- -- WHAT IS THE REAL NATURE of
American capitalism today? Is it a grand national adventure, as
politicians and textbooks aver, in which markets provide the
framework for benign competition, from which emerges the
greatest good for the greatest number? Or is it the domain of
class struggle, even a “global class war,” as the title of Jeff Faux’s new book would have it, in which the “party of Davos”
outmaneuvers the remnants of the organized working class?
The doctrines of the “law and economics” movement, now ascendant
in our courts, hold that if people are rational, if markets can
be “contested,” if memory is good and information adequate, then
firms will adhere on their own to norms of honorable conduct.
Any public presence in the economy undermines this. Even
insurance—whether deposit insurance or Social Security—is
perverse, for it encourages irresponsible risktaking. Banks will
lend to bad clients, workers will “live for today,” companies
will speculate with their pension funds; the movement has even
argued that seat belts foster reckless driving. Insurance, in
other words, creates a “moral hazard” for which “market
discipline” is the cure; all works for the best when thought and
planning do not interfere. It’s a strange vision, and if we
weren’t governed by people like John Roberts and Sam Alito, who
pretend to believe it, it would scarcely be worth our attention.
The idea of class struggle goes back a long way; perhaps it
really is “the history of all hitherto existing society,” as
Marx and Engels famously declared. But if the world is ruled by
a monied elite, then to what extent do middle-class working
Americans compose part of the global proletariat? The honest
answer can only be: not much. The political decline of the left
surely flows in part from rhetoric that no longer matches
experience; for the most part, American voters do not live on
the Malthusian margin. Dollars command the world’s goods, rupees
do not; membership in the dollar economy makes every working
American, to some degree, complicit in the capitalist class.
In the mixed-economy America I grew up in, there existed a
post-capitalist, post-Marxian vision of middle-class identity.
It consisted of shared assets and entitlements, of which the
bedrock was public education, access to college, good housing,
full employment at living wages, Medicare, and Social Security.
These programs, publicly provided, financed, or guaranteed, had
softened the rough edges of Great Depression capitalism,
rewarding the sacrifices that won the Second World War. They
also showcased America, demonstrating to those behind the Iron
Curtain that regulated capitalism could yield prosperity far
beyond the capacities of state planning. (This, and not the arms
race, ultimately brought down the Soviet empire.) These
middle-class institutions survive in America today, but they are
frayed and tattered from constant attack. And the division
between those included and those excluded is large and obvious
Today, the signature of modern American capitalism is neither
benign competition, nor class struggle, nor an inclusive
middle-class utopia. Instead, predation has become the dominant
feature—a system wherein the rich have come to feast on decaying
systems built for the middle class. The predatory class is not
the whole of the wealthy; it may be opposed by many others of
similar wealth. But it is the defining feature, the leading
force. And its agents are in full control of the government
under which we live.
Our rulers deliver favors to their clients. These range from
Native American casino operators, to Appalachian coal companies,
to Saipan sweatshop operators, to the would-be oil field
operators of Iraq. They include the misanthropes who led the
campaign to abolish the estate tax; Charles Schwab, who
suggested the dividend tax cut of 2003; the “Benedict Arnold”
companies who move their taxable income offshore; and the
financial institutions behind last year’s bankruptcy bill.
Everywhere you look, public decisions yield gains to specific
For in a predatory regime, nothing is done for public reasons.
Indeed, the men in charge do not recognize that “public
purposes” exist. They have friends, and enemies, and as for the
rest—we’re the prey. Hurricane Katrina illustrated this
perfectly, as Halliburton scooped up contracts and Bush
hamstrung Kathleen Blanco, the Democratic governor of Louisiana.
The population of New Orleans was, at best, an afterthought;
once dispersed, it was quickly forgotten.
The predator-prey model explains some things that other models
cannot: in particular, cycles of prosperity and depression.
Growth among the prey stimulates predation. The two populations
grow together at first, but when the balance of power shifts
toward the predators (through rising interest rates, utility
rates, oil prices, or embezzlement), both can crash abruptly.
When they do, it takes a long time for either to recover.
The predatory model can also help us understand why many rich
people have come to hate the Bush administration. For predation
is the enemy of honest business. In a world where the winners
are all connected, it’s not only the prey who lose out. It’s
everyone who hasn’t licked the appropriate boots. Predatory
regimes are like protection rackets: powerful and feared, but
neither loved nor respected. They do not enjoy a broad political
In a predatory economy, the rules imagined by the law and
economics crowd don’t apply. There’s no market discipline.
Predators compete not by following the rules but by breaking
them. They take the business-school view of law: Rules are not
designed to guide behavior but laid down to define the limits of
unpunished conduct. Once one gets close to the line, stepping
over it is easy. A predatory economy is criminogenic: It fosters
and rewards criminal behavior.
Why don’t markets provide the discipline? Why don’t “reputation
effects” secure good behavior? Economists have been slow to
answer these questions, but now we have a full-blown theory in a
book by my colleague William K. Black, The Best Way to Rob a
Bank Is to Own One. Black was the lawyer/whistle-blower in the
Savings and Loan and Keating Five scandals; he later took a
degree in criminology. His theory of “control fraud” addresses
the situation in which the leader of an organization uses his
company as a “weapon” of fraud and a “shield” against
prosecution—a situation with which law and economics cannot
For instance, law and economics argues that top accounting firms
will protect their own reputations by ferreting out fraud in
their clients. But, as with Enron, Tyco, and WorldCom, at every
major S&L control fraud was protected by clean audits from top
accountants: You hire the top firm to get the clean opinion.
Moral hazard theory shifts the blame for financial collapse to
the incentives implicit in insurance, but Black shows that the
large frauds were nearly all committed in institutions taken
over for that purpose by criminal networks, often by big players
like Charles Keating, Michael Milken, and Don Dixon. And there’s
another thing about predatory institutions. They invariably fail
in the end. They fail because they are meant to fail. Predators
suck the life from the businesses they command, concealing the
fact for as long as possible behind fraudulent accounting and
hugely complex transactions; that’s the looter’s point.
That a government run by people rooted in this culture should
also be predatory isn’t surprising—and the link between George
H.W. Bush, who led the deregulation of the S&Ls, his son Neil,
who ran a corrupt S&L, and Neil’s brother George, for whom Ken
Lay sent thugs to Florida in 2000 on the Enron plane, could
hardly be any closer. But aside from occasional references to
“kleptocracy” in other countries, economic opinion has been slow
to recognize this. Thinking wistfully, we assume that government
wants to do good, and its failure to do so is a matter of
But if the government is a predator, then it will fail: not
merely politically, but in every substantial way. Government
will not cope with global warming, or Hurricane Katrina, or
Iraq—not because it is incompetent but because it is willfully
indifferent to the problem of competence. The questions are, in
what ways will the failure hit the population? And what
mechanisms survive for calling the predators to account?
Unfortunately, at the highest levels, one cannot rely on the
justice system, thanks to the power of the pardon. It’s politics
or nothing, recognizing that in a world of predators, all
established parties are corrupted in part.
So, how can the political system reform itself? How can we
reestablish checks, balances, countervailing power, and a sense
of public purpose? How can we get modern economic predation back
under control, restoring the possibilities not only for
progressive social action but also—just as important—for honest
private economic activity? Until we can answer those questions,
the predators will run wild.
James K. Galbraith
teaches economics at the Lyndon B. Johnson School of
Public Affairs at the University of Texas-Austin. He previously
served in several positions on the staff of the U.S. Congress,
including executive director of the Joint Economic Committee.
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