Nicholas Shaxson

The Finance Curse


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Facebook, Google, Amazon, and Netflix. The Obama administration was so cozy with Google that it may as well have given it the keys to the White House. The Trump administration is even worse.2

      Most people still aren’t paying attention. How did these remarkable blind spots come to exist? The perils of monopoly power have been clearly understood since long before Rockefeller built Standard Oil. “If we will not endure a king as a political power,” said Senator John Sherman, who sponsored America’s first proper antitrust law in 1890, “we should not endure a king over the production, transportation and sale of any of the necessaries of life.” The New Deal program that followed the crash of 1929 had strong antitrust measures—a large and varied body of anti-monopoly laws to tackle big banks and great concentrations of economic power—at its heart. Yet in the modern era this has all been swept away. Who killed anti-monopoly?

      There is, in fact, a clear answer to this question. We can trace the shift back to an ideological insurgency in the 1960s and 1970s, led by a group of Chicago School economists who would, as with a magician’s trick of misdirection, shift attention away from the all-important question of whether corporations have too much economic and political power and toward a far narrower issue: whether the price is right. If the merger of two large companies doesn’t lead to higher prices, the argument now goes, what’s the problem? The services of Facebook and Google are free, apparently, so move along, folks, there’s nothing to see here. This narrowing of focus has blinded us to many deeper issues, which are among the biggest drivers of financialization and the finance curse.

      This revolution was sparked at a dinner party in 1960 at the Chicago home of Aaron Director, an American economist with a small mustache, horn-rimmed glasses, and a lightweight boxer’s wiry frame. Director was a contrarian, pugnacious antigovernment fanatic, a former radical leftist union organizer who had crossed over and now seemed hell-bent on smashing the consensus that once fed his idealism. His politics were completely, purely free-market and even to the right of Milton Friedman, the godfather of libertarian free-market economics, who was married to Director’s sister, Rose. “Family dinners at the Friedmans’ house must have been a bundle of laughs,” said Matthew Watson, professor of political economy at Warwick University in England. “There can’t have been many house guests where Milton would have been accused of being too pro-government and too left wing.” That particular night Director hosted twenty dinner guests, conservative thinkers including not just Friedman but George Stigler (who would go on to make a name for himself attacking government regulation), the British economist Ronald Coase, and a fire-breathing lawyer called Robert Bork.3

      The University of Chicago was a bear pit, an arena of intense macho intellectual combat where academics were constantly struggling to outdo each other with clever theories about efficient markets—theories that often perched on toe-curling assumptions—to defend unconventional, even antisocial positions usually supporting big business and attacking government. Mathematical and logical elegance trumped the messy reality of life and the world. Director himself was one of the truest of true believers who thought pretty much anything worthwhile could and should be shoehorned into the price mechanism in the interest of “efficiency.” His messianic zeal mesmerized many of his students. “I regarded my role as that of Saint Paul to Aaron Director’s Christ,” Coase said. “He got the doctrine going, and what I had to do was to bring it to the Gentiles.” Bork, another disciple, said Director “gradually destroyed my dreams of socialism with price theory,” adding that many of his colleagues “underwent what can only be called a religious conversion.”

      The guests that evening came to listen to Coase present a draft paper, “The Problem of Social Cost.” Stigler remembered wondering “how so fine an economist could make such an obvious mistake.” At the start of the evening Coase summarized his idea and a vote was taken. All twenty guests opposed him.4

      Coase deployed a novel argument. Corporations in those days were supposed to be subject to the law—or at least the law came first. If a corporation was pumping illegal pollutants into a river, you went out and found the pipe or some incriminating documents, then wielded the law to stop it. Pollution is an externality, a consequence that affects other parties who aren’t associated with the transactions or businesses involved. Markets can’t generally solve externalities; it had long been accepted that governments and laws needed to step in to stop such failures in the market. Coase wasn’t having this.

      Imagine, he said, that a farmer’s cattle ravaged his neighbor’s wheat crop. If the law held the cattle farmer liable, he’d have to pay for a fence or negotiate compensation with his neighbor. If the law didn’t hold him liable, the wheat farmer would pay for the fence. But from an overall efficiency perspective it didn’t matter which farmer paid for the fence, since the cost of the fence was the same. So the law itself didn’t really matter, he went on: laws should be subject to a sort of cost-benefit analysis where harm caused by the polluter or the careless farmer or the tax cheat should be weighed against the benefits derived by those actors who gained. It was enough to show that overall “welfare” was maximized to let this happen.

      You could extend this logic. If there was a large banking monopoly, for instance, any losses to consumers or workers could be balanced out by gains to the bank and its shareholders, and there might be no net loss overall. Bring in gains such as economies of scale reaped by larger corporations, and monopolies might turn out to be a good thing! Monopolies were the natural way markets wanted to go, and it wasn’t the job of judges to interfere. Once you took into account the apparent costs of regulation to the monopolizers, he said, it became hard to justify doing anything about them.

      The guests were stunned. Until then antitrust—the large body of established law and theory that said monopolies were harmful and that governments should regulate them—was supported both on the Left of the political spectrum, where people fretted about giant banks and industrialists oppressing workers and customers, and on the Right too, where people were keen to protect and promote competition and the integrity of markets. Coase had just lobbed a bomb into this whole edifice—and into a few other edifices too.

      The dinner progressed. The arguments mounted. “As usual, Milton [Friedman] did most of the talking,” Stigler remembered. “My recollection is that Ronald didn’t persuade us. But he refused to yield to all our erroneous arguments. Milton would hit him from one side, then from another, then from another.” But then, as in the plot of Twelve Angry Men, the mood began to change. “To our horror,” Stigler said, “Milton missed him and hit us.” By the end of the evening they took another vote: all were for Coase. “I have never really forgiven Aaron for not having brought a tape recorder,” Stigler said. “It was one of the most exciting intellectual events of my life.”5

      This violent attack on the foundations of legal authority—that laws should be subjected to economic cost-benefit calculations and rejected if they fail to pass muster—was a classic example of the Chicago School’s “economics imperialism”—a power grab by economics professors with ambitions to colonize and dominate as many areas of social and political life as they could lay their hands on. It was at the same time an example of red-blooded neoliberalism, which argued that lawyers and laws should bow down to economists and economics and that everything had a price. The scale and success of this insurrection was made clear later on, in 1983, when a group of Chicago School economists was reminiscing about—one might say gloating over—this power grab. This short exchange between Bork, influential jurist and economist Richard Posner, and Henry Manne, another influential economist, gives a flavor.

      BORK: As far as I know, the economists have not yet done any damage to constitutional law.

      POSNER: We are working on that.

      MANNE: We’ll chase you out of that too. [laughter]6

      It doesn’t take a genius to see how elevating easy-to-massage numbers above the rule of law was likely to boost lawbreaking everywhere, not least in the financial sector.

      These revolutionary ideas percolated slowly at first, but cheerleaders and corporate funders weren’t hard to find. One early enthusiast was a partner at a Wall Street consulting firm who was already a fanatical devotee of the antigovernment novelist and libertarian guru Ayn Rand.