October 16, 2002
"The theory is beautiful. It's reality that's got
me baffled." - Source unknown
"Markets cannot exist without shared conceptions
of how individuals should behave... In a word, market societies
depend on morality, not as some automatic emanation of the
market, but as a socially constructed set of rules that are
ultimately enforced by government." - Fred Block, "The
Rights's Moral Trouble" The Nation, September 30, 2002
In late June of this year, I instructed my broker to sell
all my stocks and to put the proceeds into municipal bonds.
Since then, the DOW has lost 20% of its value and the NASDAQ
has lost 22%. My broker thinks I am something of a financial
genius. No way! But I might have accepted that compliment
had I followed my gut hunches in the Spring of 2000 and bailed
out of the stock market. At the time, the DOW was over 11,000
and the NASDAQ over 5,000. Alas, my broker and PBS's Wall
Street Week persuaded me then to "stay the course."
Since then, I have decided to let my gut instinct trump Lou
Dobbs, Louis Rukeyser and The Wall Street Journal.
All this notwithstanding the fact that my broker, a certifiably
honorable fellow, works for a reputable firm untouched by
the recent scandals, and reports to me the advice of an army
of ivy-league PhDs in economics and finance, and more than
a few Nobel Laureates. Moreover, I have never taken a formal
course in finance, and in the only economics course I ever
took (as a freshman) resulted in one of my very rare Cs.
And yet today I am inclined to discount the pronouncements
of mainstream economists. How do I justify this hubris? Simply
this: I choose to live in and deal with the real world. On
the other hand, most of the neo-classical economists that
dominate Economics Departments in the universities, and that
define the "conventional wisdom" of the securities industry
and conservative politics, have elected to dwell in a Wonderland
of theory and dogma that is blissfully detached from the inconvenience
of dealing with stubborn natural facts. They fail to appreciate
that, as Gaylord Nelson put it, the economy is a wholly owned
subsidiary of the natural environment. (An elaborated defense
of these outrageous pontifications may be found in elsewhere.
New Alchemy," then follow the links). Honorably excluded
from this criticism are the so-called "ecological economists"
such as Herman Daly, Kenneth Boulding and Robert Costanza,
to name a few, and a few economists with a surviving and operative
social conscience, such as Paul Krugman and Amartya Sen. All
of these estimable economists have a healthy appreciation
of the limitations of their discipline.
The chattering media economists, along with my broker, reassure
me that the stock market must soon find a "hard bottom," from
which it will recover from the recent "setback" and resume
a steady ascent A good time to "get back in," they say.
From my philosophically and ecologically informed, and my
economically uninformed, perspective, I beg to differ. I fear
that there is much worse ahead. And this is why:
The accounting scandals now in the news (Merrill-Lynch,
Anderson, Enron, Global Crossing, Sunbeam, ImClone) are the
tip of the iceberg, with much more to follow. Through "creative
accounting," stock prices have been artificially inflated
as anticipated earnings have been put on the plus side and
negative figures hidden. All this puts off the inevitable
day of reckoning long enough for the executives to cash in
on their stock options, feed their foreign accounts and then
bail out. Now that day of reckoning is fast approaching. Enron,
Global Crossing and WorldCom are just the beginning.
In this era of enthusiastic de-regulation, the "regulatory"
agencies (e.g., the Securities and Exchange Commission and
the Federal Energy Regulatory Commission) have failed to regulate.
Instead, their lapdog commissioners have been paid off for
their inaction with cushy corporate Board appointments. For
example, Sen. Phil Gramm's wife, Wendy, formerly a FERC commissioner,
moved on to the board of Enron. And the revolving door goes
both ways, as Harvey Pitt, a corporate fox (previously a lawyer
for Anderson), is appointed to the SEC to watch the hen house.
Even so, unbiased regulation remains an indispensable function
which only the government (in our behalf) is qualified to
perform. The game is not possible without an umpire. So when
the umpires leave the field, the "game" deteriorates into
anarchic chaos. (See my "Kill
The dirty secret is now out: the securities market
is rigged. Insider trading laws are a joke because they are
unenforceable. (Do you really believe that a couple of high-finance
types don't trade insider stock tips when they are alone teeing
up on the back nine?) Only after the low-hanging fruit has
been picked by the insiders are the rest of us allowed into
the orchard. Though "smart money" types are privately convinced
that ethics should be confined to Commencement speeches and
that morality is for Sunday School, in fact flourishing markets
are founded upon a moral virtue: trust. That trust
has been conspicuously violated. Accordingly,
It is finally beginning to dawn on small-time investors
like you and me that we have been taken for suckers, and so
we are getting out. In addition, because the Bush regime has
managed to piss off most of the rest of the world (with broken
treaties, visions of empire, and arrogant bullying), a flood
of foreign investors are also pulling out of the US economy.
Efforts to restore trust, such as the legal harassment of
Martha Stewart, are recognized as superficial window-dressing.
Major culprits such as Ken Lay, Thomas White and Dick Cheney
"Reverse Robin-Hoodism" (taking from the poor
and giving to the rich) is the essence of Bush's economic
policy. It is exemplified in Bush's tax "reforms" (half the
refunds to the top 1%) and the now-deferred but eventual abolition
of the estate ("death") tax, the return of federal deficits,
the raid on social security, the exporting of US jobs overseas,
etc. ad nauseam - all this is increasing the "top-heaviness"
of the economy. Those who produce the wealth (i.e., the "bottom
98%) are being fleeced by those who own and control the wealth
(the top 2%). Today a Fortune 500 CEO earns in half a day
what his average worker earns in a year - up ten-fold from
twenty years ago. (See "The
Deserving Rich?") And it still isn't enough - the CEO's
want more. Result: a coming loss of demand as disposable income
in the general public continues to shrink. "No sales without
buyers" is a bit of economic wisdom that is apparently beyond
the comprehension of the geniuses in Washington who draw up
In standard conservative economic policy there is
no tomorrow - not in the long-term, anyway. It's basic freshman
economics. When values are measured in cash (i.e., "monetized"),
the future is "discounted." For example, at a discount rate
of 5%, present value is halved in fourteen years. At the same
rate, the "value" of the remote future decreases to virtually
nothing. Thus a modest short-term return on an investment
in nuclear power offsets, by this arithmetic, the death of
thousands of innocents in the remote future. (For an elaboration,
see the section "The Pricing Argument" in "Perilous
Bush administration and congressional policy-makers,
along with many of their economic advisors, are ignorant of
fundamental ecological and scientific principles, and moreover
they are proud of it. When physicists at MIT determine that
missile defense is a chimera, the Bushistas respond by threatening
to cut federal funding of MIT research. Although global warming
is the consensus opinion of atmospheric scientists throughout
the world, Christy Whitman's reply is to keep global warming
out of the annual EPA report. And when government social scientists
come up with the "wrong" conclusions about crime, poverty
and teen-age pregnancy, the Bush brigades fire the scientists
and/or "de-fund" the agencies. In short, the message of the
Bush administration to the scientists is "don't come to us
unless you have the answers we want." (See "The
President of Fantasyland").
Science, which is so despised by the Bush bunch, projects
that global oil production will peak some time this century
Peak and "The
Oil Trap"). No scientific projection bears more gruesome
implications for the world economy, and perhaps for the civilized
condition itself. With a worldwide "Manhattan Project" devoted
to a transition to a post-petroleum economy, we mighty dodge
that bullet. But don't expect any concern about this coming
crisis from the oil men at the head of our government. They've
got it made for the rest of their lives. Posterity? What has
posterity ever done for Dubya?
In other words, the governing economic theory is
a dogma, without what Freud called a "reality principle a
cognitive device whereby "the real world" can significantly
impact and correct the dogma. Case in point: the doctrines
of "supply side" and "trickle down," whereby a cut in taxes
and diversion of still more wealth to the wealthy "must" result
in economic growth, enhanced revenues, and improved standard
of living for all. It was tried in the Reagan administration
and, as we well know, failed spectacularly, as the national
debt tripled. But never mind that, say the true believers.
When the Clinton administration rejected "supply side" theory
and raised taxes, two ex-Professors of Economics, Dr. Phil
Gramm and Dr. Dick Armey, predicted economic catastrophe.
Their dogma so stipulated. Instead, the federal budget once
again showed a surplus, and the United States enjoyed a decade
of unprecedented prosperity. Unfazed by this compelling evidence,
the Bush economists reinstated "supply side" economics (what
Poppy Bush called "Voodoo economics" before he joined the
Reagan team) and, well, you know the rest. As true dogmatists,
conservative "supply side" economists prefer not to be "confused
by the facts." Instead, they believe their own propaganda
and adhere faithfully to their doctrines. When reality is
found to be inconvenient, they proceed to "invent" a more
congenial "reality." These are paradigmatic "post-modernists"
for whom "reality" is simply what they want it to be. Scientific
evidence, history, practical experience, even common sense,
An economy run by people like this is not an ideal environment
for one's investments.
And so, in sum, the reason we are heading straight for disaster
is that our country and its economy are in the hands of individuals
who are (a) ignorant, (b) dogmatic, and (c) arrogant. And
(b) and (c) foreclose remedies for (a). As Walter Mondale
used to say (uselessly) about the Reagan administration, "they
know all the answers, and what they know is wrong."
The good news is that this dreadful situation is not hopeless.
The bad news is that a remedy is bloody unlikely so long as
the present crowd is in power.
Here are some remedies:
The public sector must be revived, reversing four
decades of disparagement and neglect. The notion that a flourishing
economy can somehow emerge ("as if by an invisible hand")
out of a population composed entirely of private, self-serving
egoists, is a pernicious and dangerous myth. Public service
must once again be recognized and properly compensated. September
11 reminded us all of the dedication and heroism of the police
and firefighters. There are numerous other individuals on
the public payroll upon whom our society and economy depend:
air traffic controllers, food inspectors, forest rangers,
weather forecasters, researchers and teachers - the list is
endless. We must no longer treat these as "loser professions"
for "bureaucrats" who can't cut it in the "the real world"
of the private sector. On the contrary, we depend on them
and they deserve our gratitude and support.
The regulatory regime must be restored to full and
effective function. We must bring back the "umpires." Every
governmental regulatory agency emerged out of a perceived
public necessity: the Food and Drug Administration was established
to deal with the scourges of tainted meat and untested drugs;
the FCC was established at the insistence of the broadcast
industry; the SEC and the FDIC emerged in response to the
abuses of the securities industry which led to the crash of
1929 and great depression that followed. The recent enthusiasm
for "deregulation" was founded on dogma and driven by special
interests, and in disregard of the compelling practical historical
experience which initiated these agencies.
Spread the word, through the schools and the media,
is not just another dogma. And then, apply scientific
expertise and principles to public policy. Acknowledge, through
scientific awareness, the physical and environmental limits
and implications of public policy. Whitehead said it well:
"In the conditions of modern life, ... that race that does
not value trained intelligence is doomed."
Supplement "trickle down theory" (wealth generated
by the investments of the rich) with "percolate-up theory"
(wealth generated by the expertise and labor of the workers).
Recognize that national wealth and civic tranquility are best
accomplished through the cooperative effort of all segments
of society, not through "class warfare."
We must invest in both physical infrastructure (roads,
rails, utilities, public buildings) and "human infrastructure"
( productive skills, civic responsibility, historical consciousness,
political engagement), which means, once again, a renewed
dedication to and investment in public education. We have,
of late, paid dearly for the neglect of these infrastructures
during this heyday of "the private society." Unless they are
restored, we will be ill-prepared to deal with the crises
We must recognize that a society is more than its
economy. A healthy and vigorous economy rests upon a foundation
of non-economic values - the affirmation of family and community,
the cultivation of the arts and humanities - and these values
in turn issue from a system of education dedicated to more
than the production of workers and customers for the corporations,
and with media dedicated to more than the engineering of consumer
demand and the generation of profits.
There is scant evidence that the Bush administration has
the slightest interest in effecting these remedies. And so
we are unlikely to escape the dreadful economic costs of their
folly unless and until they somehow gain economic and moral
enlightenment. Alas, this is unlikely since such a conversion
could only follow a repudiation of their cherished dogmas.
Thus the compelling task before us is to replace these short-sighted
and self-serving ignoramuses with new leaders.
Until that happy day, I will continue to keep my savings
in municipal bonds, T-bills, and other such securities. And
if I buy stocks again, they will likely be in enterprises
that cultivate a flourishing community of investors, managers
and workers, that earn one's trust through clear manifestations
of integrity and civic responsibility , that maintain a healthy
respect for science, and that deal with the real world. For
the present, it appears that such enterprises are more likely
to be found beyond our shores.
Dr. Ernest Partridge is a consultant, writer and lecturer
in the field of Environmental Ethics. He publishes the website,