The Problem of Looting
by Michael S. Rozeff
by Michael S. Rozeff
Looting is a basic human behavior. The question is how to control it, or protect one's property. There are four organizational answers: do-it-yourself, do it in mutual association with others, do it by hiring others, and do it through the state. The first three of these maintain one's liberty to choose. The fourth does not, unless one selects one's state freely, which is not today the case; and if one selects one's state freely, it amounts to hiring others.
We don't want to be looted, so we choose one or more of these methods and use them concurrently to bring looting down to acceptable levels.
The liberty to obtain protection has numerous advantages over the state's provision of protection. A person who makes his own choice will do so more carefully. He will know his needs better. He will connect what he has bought with what he experiences in the way of service. He can change his protection as his needs change. He can change his provider of protection at his will, that is, he can hire and fire protectors quickly and flexibly according to his needs and perceptions of their quality. He can learn about protection services from others. He stands to gain when protectors compete with one another (and with the alternatives of self-protection and mutual protective association) to provide the services of protection. When protectors compete to protect, they actively discover new and better ways to protect while satisfying the needs of those who want protection. They innovate.
Liberty provides the crucial underlying benefits of entry and exit by those interested in a service. This is the ultimate check and balance. It undergirds the competition to provide more effective protection. Self-protection always competes against other methods, and they compete with self-protection. No single method can gain an unwarranted power over others.
Only by satisfying the goal of protection at a price and quality that persons demand can an alternative survive. Liberty provides the crucial component of price and quality discovery. Furthermore, liberty provides the crucial component of discovering the nature of the services that are in demand. The borders and outlines and content of goods and services are not set in concrete. They must be found out dynamically through time.
This is a formidable list of benefits of having free market protection.
On the other hand, the state's protection services have serious problems. On each count that liberty provides benefits, the state fails or is inferior. The main problem with a state as protector is that the state, by definition and construction, has monopoly power. Monopoly undermines every one of the incentives and strong points of liberty mentioned earlier and forecloses them.
Under a state, those seeking protection then have to protect themselves against the state's looting those who want it to protect them against looting. The incentives to state looting are immense, since it has monopoly power. The modern organizational solutions to that problem involve a set of control devices that simulate hiring and firing one's protectors. They attempt to mimic liberty and are even equated in political theory with liberty although they are an historical way station to the real thing. These devices include limiting the actions of government constitutionally, voting for representatives, independent branches of government, free speech, an independent police and justice system, civil service tenure, office holding being open to many, audits and accounting, government watchdogs, strictures against bribery and corruption, freedom of information, and ethical norms and training. These are all extremely important in limiting the extent of looting through government. They are admirable and innovative. They should not be dismantled until society has alternative methods of preventing looting in place, but they have been and are being dismantled, which exacerbates looting by and through the state.
These control measures, welcome as they are, unfortunately do not reduce to an acceptable level the use of the organization of government to loot the people it is empowered to protect against looting. To prove that assertion, we engage in a thought experiment. We ask the state to allow all those who wish to break off relations with it to do so. We attach the condition that they be allowed to remain in the place where they live. In other words, we ask the state to allow anyone who wishes to stop paying taxes and opt out of the state's protections and laws to do so. The result of this experiment is clear. Many people will opt out if provided the opportunity. It is equally clear that no state will allow mass numbers of its citizens to opt out. This implies that many people are being looted against their wills by their own government. A recent example of this is the massive government $750 billion measure called the Economic Stabilization Act of 2008 that involves the Troubled Asset Relief Program (TARP.) A super-majority of Americans was against this program, but Congress passed it nonetheless. Since the involuntary taking of one's property is what looting is, this program evidently involves massive looting.
The Wall Street Journal editorializes that "We supported TARP as a way to prevent a financial meltdown...TARP has since become a cash pool for all and sundry..." The writers failed to understand that government is born to be bad because it often uses its monopoly to create commons problems. When there is an organization such as the state that has access to vast amounts of money, pools it, and redistributes it, and when the controls over this process are weak, the opportunities for looting rise exponentially.
We are told in 2009 that we the people must pay to repair ailing and failing banks because the economy depends on the credit they provide. This is the gun held to our heads by government propagandists. The gun is a threat, but it is only a threat because we do not have liberty and monetary freedom. We are entangled within the existing monopoly arrangement. In reality, credit is not difficult to produce. It is not only within the arcane province of a few large and favored banks. It is clear that these have not done a very good job of it anyway. Anyone can produce credit, and that credit often can be used as a medium of exchange. Had we liberty, Wal-Mart and other retailers would jump into this in an instant if given the chance. So might many local and regional banks that have sounder balance sheets than the giants that are the beneficiaries of government. Had we liberty, we would rapidly evolve new credit providers. The existing system of forced and monopoly money upon which much credit is based would rapidly give way to competing methods of clearing accounts and exchanging goods and services. We should be looking toward dismantling the Fed and allowing anyone, including banks, to issue their own notes. Let competition in money and credit become the order of the day and the problems of general inflation and deflation will recede. Until we do that, we will be held hostage by the central banking system and subjected to looting from that source and the government to which it is allied.
The state's looting goes back to day one. The first Congress adopted Hamilton's plans, based on his Report on the Public Credit. It paid off in full or at par of $1 the depreciated notes that had been circulating at 20-25 cents on the dollar. This enriched speculators at the expense of taxpayers. Congress also assumed the debts of the states. Finally, Congress passed a measure that started the Bank of the United States. Washington signed it. This act had no basis in the Constitution.
The state has always looted some of us for the benefit of others of us, and it always will. That is the dynamic that is built into its very structure. The state always has an incentive to break down and subvert the means that have been instituted to control its looting.
When we hear the term "looting," we are apt to think of people looting stores in New Orleans or looting museums in a war torn area. We are far less likely to think of looting through the government and using the government as a means of looting. Yet this form of looting far exceeds the looting by individuals. The larger amounts are not all that matters. Government looting dissolves society and creates an unstable and unsafe society in which progress becomes limited and investment insecure. That is why government looting is so serious a problem.
The state is a focal point of looting, since this is what it is empowered to do, controlled only by the control devices listed earlier. When those devices are weakened or break down, then the looting goes up in size. When voting no longer matters or when it pays to keep one representative in office for a long time, then more looting is encouraged. When representatives routinely receive donations from interested parties, looting goes up. When the public has little influence over the agenda and over candidates, looting goes up. When the justice system comes under the influence of other branches or when the legislators come under the influence of the executive, then the checks and balances break down and looting goes up. When the Constitution is expanded and government loses its limits, then looting goes up.
Looting arises in many subtle forms. We do not always have to see representatives enriching themselves or finding well-paid jobs in industries they once regulated. Government guarantees are exceedingly insidious. They seem to cost nothing or next to nothing. The FDIC insurance of bank deposits appears to cost little as long as banks do not fail, yet it transfers wealth to the stockholders of banks and the taxpayers bear the risk of paying off on the insurance. In times like now, when the banking system is insolvent, there are not enough FDIC funds to pay depositors. Then, to avoid dismantling the banking system, Congress appropriates vast sums that directly go to those who hold bank obligations so that the banks do not fail. The bill comes due. (The term appropriate is a synonym for looting.) When the guarantees are not properly funded as insurance, the bills come due. And the government has little incentive to fund them properly. In other words, it has the incentive to loot the taxpayer for the benefit of others.
In the frauds that were perpetrated in the 1980s by many savings and loan institutions, one device was cash for trash. The S&L sold bad loans (in a fake sale) to an associate. This removed them from the books and made the S&L's financial condition look more sound. This sounds familiar. It sounds like the Fed's transfers of good securities to replace the bank's bad loans, or its purchases of unsound mortgage-backed securities to bolster bank balance sheets. S&Ls often filed false documents or altered records. Now we have federal authorities who loosen up or fail to enforce mark-to-market rules or seek ways to delay the recognition of bad loans by failing banks. The S&L owners sometimes granted themselves loans using depositor funds. Now we have federal authorities who make loans directly to the banks. The land flip in the S&L days was a fraudulent method that involved selling and reselling the same property at artificially inflated prices, so that it could then serve as collateral for a large loan. Today we have the federal government doing everything it can to maintain home prices at artificially high levels, such as by continuing to subsidize mortgage rates as the Fed has done.
Many S&Ls were looted. It was a substantial element in the ultimate high cost to taxpayers. Today we have a similar kind of looting going on that involves banks and holders of various kinds of securities, but this looting is going on under an official government umbrella. We have many new acronyms and facilities. We have new programs. The costs are astronomical. But it is all looting.
We cannot entirely eliminate looting, either with the state as protector or with free market means of protection. We can reduce it by choosing the free market. It is for one thing a question of simple justice that those who wish to "fire" the state be allowed to do so. It is for another thing a question of choosing a means of protection that provides better protection at lower cost.
The looting involved in social programs finds acceptance with many elements of the population, but that does not change the fact that, for those who are taxed unwillingly, these programs are looting through the mechanisms of the state. The government's proposed "stimulus" measure of some $850 billion will loot many Americans who would not voluntarily pay their share of this. It is our situation today that enlargement of government involves greater looting and reduction in government involves less.
Some, like Professor Robert A. Dahl, recognize the imperfections of the state. He calls the existing system a polyarchy to distinguish it from democracy. He holds out as an ideal a democracy that would have effective participation of all (including affecting the agenda), voting equality, enlightened understanding, and inclusiveness. This ideal will never be attained from a state. The state will always move the political system away from this ideal and toward its own empowerment and more and more looting.
Liberty as an ideal reduces that which is seen as a "public problem" and must be settled by public (state and government) means to a minimum. This reduces the sphere of looting and potential looting.
The only way open to the kinds of things that Dahl is reaching for through an ideal government is maximal Liberty and minimal reliance on a state with monopoly power. Full and complete liberty to choose one's protection empowers the person to express his own preferences, set his own agenda, and be on equal terms of liberty and rights with others. It encourages, rewards, and furthers enlightened understanding. It allows continuous improvement in protection technology. Equally important, it reduces looting and the potential for looting when it reduces the state. Power will not disappear, as power is necessary to protect property. But the aggressive power of the state will be checked and mitigated. Liberty is an arrangement in which power is dispersed. More importantly, it is an arrangement in which the use of aggressive power meets with a quicker and more determined response because the incentives to efficient protection are stronger. This in turn enhances the incentive to cooperate and produce, which makes aggression less desirable and more likely to be dealt with efficiently. Society launches itself into a virtuous cycle as opposed to the downward course that a state induces.
January 17, 2009
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.
Copyright © 2009 LewRockwell.com