Rethinking the Economy

If a lioness wants to catch more gazelles, she could practice sneaking up on them. She could work on her sprinting skills. In short, she could increase her odds of succeeding according to the current rules.

But if a lioness was a business, she’d have another option. She could try to get a law passed discouraging gazelles from running so much — say, grass credits for sedentary gazelles. She could fund the Don’t Break a Leg Coalition, dedicating to promoting lioness-funded research that shows running is dangerous for gazelles — especially running very fast. She could meet with the editorial board of the Gazelle Gazette and convince its editors to write an op-ed, “Change Gazelles Can Believe in,” arguing that lionesses have become less violent — and that the differences between gazelles and lionesses was exaggerated to begin with. In short, she could increase her odds of succeeding by changing the rules.

Most economists try their best to ignore this reality. Sure, they’ll denounce tariffs pushed by the sugar industry. But they act as if the rules of the game “distort” the market. In doing so, they willfully avert their eyes from what we can see on the front page every day: politics are an integral part of markets, because politics set a large portion of the market’s rules.

And as soon as we say we want the market to be governed by real rules — we want courts and cops to enforce legal contracts, we don’t want our kids drinking toxic-laced milk, we don’t want our banking system to meltdown — it’s a whole new game. Because now every business has two moves they can make: play by the rules, or try to change the rules.

When we pretend that isn’t so, we get the “deregulation” that drove our financial meltdown. The financial “deregulation” movement was Wall Street’s version of the Don’t Break a Leg Coalition. Republican and Democratic politicians and Wall Street players like Robert Rubin said, let’s unleash the power of the market by getting rid of those pesky regulations. But getting rid of the regulations that create an implicit safety net for banks that are too big to fail? No way. The result: the same thing you get if you told a teenager they can do whatever they want and you’ll bail them out if they get into trouble.

If politics are intimately intertwined with the market, what can we do to stop the lionesses from changing the rules so they win and everybody else loses? Take a page from the Founding Fathers — use checks and balances. Shape the economy so there are economic actors with the power needed to keep the lionesses in check.

In future posts I’ll give some examples of how checks and balances might work in the economy, particularly in Finance. For now, I’m going to answer two questions this Principle might raise for you.

First, instead of using checks and balances, can’t we count on good rules and smart regulators to protect us? No, because the politicians who write the rules and the regulators who enforce them aren’t independent economic actors. They are completely dependent on others for the resources they need to survive, and that means they can be easily threatened or blackmailed. If you don’t believe me, just look at the supposedly “independent” Federal Reserve. As the meltdown demonstrated, Wall Street’s had their ear; the Fed sees Wall Street as customers to take care of, not potentially dangerous creatures to keep in check. The only way to keep the lionesses in check is to have actors who have their own resources that the lionesses can’t easily take away.

Second, am I saying we need checks and balances because corporations are evil? I don’t think that’s a useful way of looking at the economy. Sure, there are CEOs who are sociopaths. But that’s not the real problem we are facing. The problem isn’t that Wall Street is run by evil, greedy bastards, it’s that given the way the economy inherently works, it’s in their self-interest to try to bend the rules in their favor. Wall Street players are no more evil than lionesses; both are just creatures of an ecosystem. And believe me, if lionesses could influence the rules of their ecosystem like Wall Street can, they would (I’ve asked).

It isn’t just bankers whose power we need to keep in check. Would you really want to live in an economy where Live-Simply, Tread-Lightly-on-the-Earth middle-class Greens were the only ones with the power to shape which products are produced and the lives we live? Not me (although at least the reeducation camp I’d be sent to would be LEED-certified).

Political power is an inherent, inextricable part of an economy. We can hide from this truth and suffer the consequences. Or we can acknowledge this truth and strive to ensure, as Montesquieu said, that “power ought to serve as a check to power.”