The Corruption of Capitalism
A strategy to rebalance the global economy and restore sustainable growth
By Richard Duncan
CLSA Books
PB, 228 pgs. US$40
ISBN: 9-8898-9424-6
Good old days
By Daniel M. Ryan
web posted January 18, 2010
The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth isn't an easy book to place. Its author, Richard Duncan, is catering to an already-crowded marketplace. Unlike many others, his narrative is somewhat of a mixed bag. His basic model is: with the failure of the Bretton Woods system, (managed) capitalism has turned into what he calls "debtism." Debtism is the use of debt to goose prosperity without any checkrein on its growth, except for an outright debt crisis. Once that crisis emerges, any attempt to reflate the debt bubble simply compounds the problem and pushes it back. Once the end of the road is reached, the economy enters into a depressionary phase where the debt has to be scaled down. In order to prevent a complete collapse, the government has to launch a massive rescue intervention into the economy. At this stage, the economy has moved from debtism to statism.
So far, he sounds like a libertarian. Despite the similarities between his theme and that of libertarians like James Grant, he isn't one. At times, he comes across as something like a liberal. His central recommendation for getting us out of the present hole, of which more later, is squarely in the industrial-policy mold. That side of him, though, is balanced by a man who genuinely thinks that America departed from fiscal and monetary soundness back in the Lyndon Johnson era. His "Toxic Twins" of debtism are Lyndon Johnson and Richard Nixon. What the hippies are to a garden-variety social conservative, Johnson and Nixon are to Richard Duncan. In this sense, Duncan can be cast as a conservative.
However, economic conservatives will likely object to his kind of past-conservation. Duncan's happy past is a day when financial institutions were tightly regulated, and financial innovation was anathema. In his penultimate chapter "A Call For Reform," he advocates that banks be as tightly regulated as public utilities – small ones. His solution for "too big to fail" is to bust the big ones up. As might be expected, he recommends that Glass-Steagall be restored. Unlike most others who do so, he sees that measure as a starting point. Duncan makes it very clear that his call for a balanced budget, strict limits on money supply growth and a reconstructed Bretton-Woods-replacement system will not solve anything unless the financial sector is clamped down upon hard. In the gales of financial-service creative destruction unleashed in the '70s-'80s, he sees little other than destructive creativity. Needless to say, he also advocated that OTC derivatives be outlawed and exchange-traded derivative be closely supervised by the government.
He also advocates pre-emptive tariffs as a means of fending off punitive protectionism. His scheme is a sliding scale of tariffs designed to combat global wage arbitrage. Although he has a point about debt-financed trade being an adulteration of free trade, it's odd to read someone who thinks that the best euchre-out of a new Smoot-Hawley tariff is a revamped Fordney-McCumber tariff. Duncan's "ethical tariff" sounds a lot like Fordney-McCumber's "scientific tariff."
Duncan has little use for supply-side economics. Like many Democrats, and like an older style of Republican, he believes that deficits are reduced through tax increases. The justification he provides is based on deficit data: Reagan's tax cuts accompanied a rise in the deficit. Clinton's tax hikes prefaced a return to surplus. The Bush tax cuts went hand-in-hand with a train of several deficit increases. Rather than try to rebut the supply siders' case, Duncan simply ignores it.
He also has little liking for the monetarist explanation of the Great Depression. In fact, his book opens by debunking it. He calls it "the 'Just Keep The Balloon Inflated' theory" (p. 8) and claims that it's made the debt crisis worse. 2008 saw more widespread carnage because the inflated-balloon theory was used to push back the day of reckoning in 2002. As indicated above, his explanation of the Great Depression is a burst credit bubble and a financial sector that got too frenetic for everyone's good. Oddly, his proposal for monetary reform is a lot like Friedman's monetary rule.
Given these differences from any extant ideology, it might be hard to believe that Duncan is little more than idiosyncratic. His narrative, though, hangs together well and doesn't bite its own tail. He aims to prove that debtism is the cause of our present woes, and that debt-financed international trade is destabilizing. He ties the rise of debtism to the decay of America's industrial sector, although he also fingers global wage arbitrage. He makes the point that policy measures which make sense in a capitalist system, such as free trade, turn into malignancies in a debtist system. His survey of the present-day global economy aims to prove that it's the end of the road for debtism. The U.S. is fated to follow in the footsteps of Japan, as the only alternative is an all-out deflationary depression. Unless America adopts…
His Remedy, And Its Flaws
Duncan certainly shows that he's a big thinker. After discussing what he believes is the most feasible alternative in today's predicament – government taking over economic activity as a palliative to keep the economy floating – he proposes a radical idea, even for industrial-policy advocates. The U.S. government should authorize 3 trillion dollars to invest in three areas: solar power, (medical) genetics and nanotechnology. The idea behind it is that these disbursements will lead to the re-industrialization of America, ensuring a more balanced trade balance. A host of new, innovative businesses that result will more than cover the expenditures by widening and deepening the tax base. Three trillion dollars spent in this way will put America back to work again and re-establish it as a paragon of productivity.
He's serious about this proposal, to the point where he raises and answers objections to it. To the objection that it would largely be a waste of money, he replies that the Japan option will cost as much (if not more) and would be money effectively wasted too. To the objection that it would socialize [actually, corporatize] the American economy, he says that we have a government-managed economy already; what he suggests is better management. He fields financing and inadequacy objections by noting that it can be financed almost as easily as (say) the residential real-estate market, and that another three trillion can be found if necessary. The only objection that he concedes as being true is, "Government ownership of such important industries would make government too powerful and pose a threat to democracy." (p. 193) His remedy is a regime of checks and balances, with the government-owned seed corporations being managed as national trusts.
Perhaps unfortunately, his proposal founders on this point. One person's citizen oversight is another person's "They expect me to work with my hands tied behind my back." Duncan's $3 trillion initiative will be corporatist, or it will be an expectations-raising failure. One not-so-well-known aspect of the World War 2 economy was the fact that co-operative businesspeople largely got their way. There wasn't laissez-faire for big business in WW2 – far from it - but there was a lot of laissez-passer. Not counting an excess-profits tax and cost-plus contracting, "co-operativeness" meant welcoming in unions and working within the framework of wartime wage and price controls. These were justified as efficiency- and organization measures for the war economy. Other than those strictures, businesspeople largely got their way because they were the ones who delivered the needed war goods.
It wasn't just the laissez-faire types who were clamped down upon in World War 2; so were the "stupid bureaucrats." Anyone who got in the way, even for procedural reasons, was likely to be chucked out of the way. This kind of environment led to what could be called the "productivity miracle" of World War 2. One point to remember is that the extra effort, the ingenuity, the organizational flair, the backbreaking work, the gung-ho attitude, the get-it-done ethos, the can-do pragmatism, was called forth solely because the United States was embroiled in a world war. People not serving felt they had to do all they could to help, and even save, the masses of soldiers who were fighting and dying on the front. Unless that sense of mission is there, those great energies will not be called forth. Differences – including important ones that are only "petty" in the context of an all-out war effort – will remain. In all-out war, "defeatism" and "negativism" can be eradicated by pointing to dead and wounded soldiers. Without a war effort, what's there to point to? What's the peace-time equivalent to "Your negativism/defeatism/obstructionism gets our troops killed"? Is there one?
Too many people who wield the "Manhattan Project" as if it were a trope don't seem to have even considered these questions. When it comes down to it, the go-to guy for such initiatives is not dissimilar to A Few Good Men's Colonel Jessup. The heroes would be quickly pegged as "dumb bureaucrats." (Don't believe me? Try comparing Jessup to the general in The Twilight Zone's pilot episode, "Where Is Everybody?") This same bone-picking applies to industrial-policy wielders, or anyone who expects an all-out war effort in the absence of a very popular all-out war. It applies to Duncan's main proposal as well. I don't want to accuse him of being pro-meat and anti-butchering, but he doesn't seem to have spent much time on the matter of implementing it. He also hasn't considered the possibility that his proposed safeguards would also smother the productivity miracles for which he hopes. It's sad but true that treating a company like a public utility engenders a public-utility work ethic, from the shop floor right up to the CEO's corner office. What difference, if any, is there between a properly-controlled national trust and a public utility?
In addition, he ignores the earmarking-as-usual ethos in D.C. Placing that kind of power in the federal government's hands won't weaken that ethos; it'll strengthen it. One politician's earmarking is another politician's constituency service. One politician's power-drunkenness is another politician's power to do good. Regardless of how irresponsible Lyndon Johnson was, he had a talent that would be sorely needed in Congress if Duncan's initiative is to come to fruition: a rough-and-ready realism about getting bills passed in the House and Senate. The earmarking and lobbying system would have to be worked with; there's no way around that.
Also, the right people have to be put in charge of the investment decisions. By "right people," I mean people who have these two characteristics: intellectual humility, with no sense of shame in admitting to ignorance or mistakes and delegating as such, combined with a very keen hype detector. (Franklin D. Roosevelt had both qualities.) One trillion big ones is going to attract a lot of hype…and a lot of go-to-sounding hopers and dreamers. To use a Wall Street analogy, an equity-investor type is the wrong person for the job. The right person is a bond-investor type.
However flawed, though, Duncan's proposal does provoke thoughts and gets the imagination going. [You've just read what it did to mine.] He thinking big in this way, and his unusually bipartisan narrative, has the potential to make this book an underground reformer's handbook. To borrow a Wall Street term, The Corruption Of Capitalism has potential to be a sleeper.
Besides, there's something endearing about a fellow who evidently thinks that the best postwar central banker was William McChesney Martin, Jr. 
Daniel M. Ryan is currently watching The Gold Bubble.
Buy The Corruption of Capitalism at Amazon.com for $40.