The Great Superstition
First Enron, now WorldCom: everyone's talking about these cases and what they say about capitalism and regulation. I'll leave it to others to discuss that aspect in more detail; it's an often neglected dimension of the whole matter that I'd like to consider.
What is especially remarkable about much of the ensuing analysis is that it strikingly reveals the double standard that exists among liberal intellectuals with regard to the private sector and the state. Consider: the value of the dollar has declined well over 90 percent since the establishment of the Federal Reserve System in 1913. Throughout the history of the gold standard in the United States, the price level had been falling, and the value of people's currency increasing. Then government stepped in and the result was an endless stream of stories about how your grandparents used to be able to buy an ice cream cone for five cents. Now imagine if a private firm had been responsible for the ongoing debasement of the currency and all the economic dislocation and impoverishment it entails. Would we not be subjected to a ceaseless series of exposés on wicked bankers and the need for government control of the money supply? Yet when the state itself is responsible for this outcome, the result is — utter silence.
I know someone who worked for a government agency and, when he found he had a surplus one year, inquired as to how he was to go about returning it. Any free marketeer knows the end of the story: he was told to spend it all in order to be able to lobby for a bigger budget the following year. This mentality is all-pervasive throughout Washington, and everyone who's ever worked there knows it. Any outraged calls for people to be brought up on charges or given prison terms?
Considering the perverse incentive structure that inheres in government, it can be no surprise that incompetence, poor performance, and outright failure are routinely rewarded. Businesses are punished by the market for their poor decisions (WorldCom and Enron are totally ruined); failing government bureaucracies are rewarded with higher budgets. The drug war has gotten us exactly nowhere? Why, it needs more money! Students are reading at a second-grade level in some government school? Nothing a little money won't solve! (Apparently the $13,000 or so per student currently budgeted in many inner-city schools just isn't enough for the kids to be expected to know fractions or the date of the Declaration of Independence.)
Naturally, intelligence services and the Department of Defense, after their miserable failure on September 11, were predictably rewarded with more money. (Undoubtedly it was an inadequate number of nuclear-capable submarines that left us so vulnerable to 19 hostile airline passengers.) And as for accounting practices, let's not even mention the Pentagon.
We well know how this works when it comes to the welfare state and fostering dependency: the bureaucracy measures success by how fast it increases the number of people on the rolls, an attitude no charitable institution relying on voluntary contributions could possibly afford to hold. In Overcoming Welfare, James Payne cites a candid description of the system by a social security official in a Midwest field office:
In the field — I was a supervisor out there for years and years — your staffing, your budget for supplies, and your awards money for the employees was based on work units. Now, work units were assigned based on the number of claims you took. So we would sit around and figure out how we could get more people on the SSI rolls, because it would benefit us. The more applications we took, the more work units, the bigger the staff: we could build up an empire.
Just keeping track of all the federal government's programs is an undertaking in itself. Payne points out that several years ago, Heritage Foundation researchers, looking exclusively at employment and job training programs, came up with nine of them, whose combined price tag was $5.3 billion. But a year later, a more thorough examination by the General Accounting Office found "about" 163 programs, costing $20 billion. How's that for an accounting irregularity: even the government's own budget office isn't certain that it had counted all the job training programs to which the taxpayers' money is allocated!
Others before me have pointed out the incongruity in looking to the federal government for redress in the Enron case, when it is precisely the federal government that has squandered more retirement money than some entire countries have ever seen. Thanks to Social Security, money that in any other savings program would have provided a substantial pool for business investment, and hence increased productivity and wealth, was instead diverted to current expenditures of dubious merit, as well as payouts to current recipients. Worse still, of course, is the pitiful (and ever-worsening) "return" that accrues to "contributors." Can you imagine the outcry if a private firm had squandered people's retirement savings like that?
In a recent conversation with colleagues the subject turned from WorldCom and Enron to the subject of police and crime in New York City. Over the course of the discussion someone pointed out that on a particular New York expressway there are people who make an illicit living cruising by and waiting for someone's car to break down. At that point, they stop, threaten the hapless motorist, and strip his car of anything that might fetch them money. They know very well that the police are completely incapable of doing anything about this, and that law enforcement will get involved only if physical harm is done to the poor driver. So these crooks are careful not to hurt their victims.
Once when I lived in Manhattan a friend who had come to visit me from Connecticut had his car stereo stolen while we were eating. A police car happened to drive by as we surveyed the car and realized what had occurred. We flagged him down and explained the situation. He told us it was a real shame, and drove away.
Let's not even discuss the question of the percentage of crimes, even serious ones, that the New York police actually manage to solve, because it's frightening. And let's leave aside the fact that according to a former New York police captain of my acquaintance, exactly nothing happens to a first-time car thief.
The point I wish to make is this: what would be people's reaction if a private firm were this negligent, and so obviously incapable of carrying out its task? It would be cited as yet another example of the need for oversight of the private sector and strict regulation of the market. State failure, on the other hand, to the extent that it is noticed at all, is a matter of head shaking and chuckling, but almost never one of demands for resignations or independent oversight into its conduct. Yes, occasionally a flagrantly corrupt official resigns, but no one is losing his job because the postal system is expensive and inefficient or the police department can't do anything about auto theft. The state has somehow managed to exempt itself from ordinary standards of behavior and performance, and many people have, without thinking, simply gone along.
The fact is, it is as fashionable as ever in elite circles to condemn the private sector and to castigate its defenders as hopelessly naïve, while at the same time looking with hushed awe to the state as the source and summit of all that is good. Intellectuals in the universities, in the media and in government itself make entire careers out of encouraging and perpetuating this perverse superstition. As Murray Rothbard noted in 1992,
The ruling elite, whether it be the monarchs of yore or the Communist parties of today, are in desperate need of intellectual elites to weave apologias for state power. The state rules by divine edict; the state insures the common good or the general welfare; the state protects us from the bad guys over the mountain; the state guarantees full employment; the state activates the multiplier effect; the state insures social justice, and on and on. The apologias differ over the centuries; the effect is always the same.
So the state, the biggest bumbler, swindler, thief, and accounting crook of all is going to step in to protect us from the private sector. Who's naïve now?
June 29, 2002
Copyright 2002 by Thomas E. Woods, Jr.
Thomas E. Woods, Jr. [send him mail] holds a bachelor's degree from Harvard and a PhD in history from Columbia. He is professor of history at Suffolk Community College on Long Island, associate editor of The Latin Mass, and an adjunct scholar of the Ludwig von Mises Institute."