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Crisis of legitimacy: What is to be done?

Well, damned if I know. But it is Sunday, so I suppose I should write an Op-Ed. But I've got to go caulk a tub. So in lieu of a thumbsucker, I'd like to yoke three not-to-heterogeneous sets of ideas together.

The first comes from George Friedman at Global Economic Intersection, another interesing financial blog, reprinting an article originally in Stratfor. Quoting in relevant part:

Classical political economists like Adam Smith (pictured) or David Ricardo never used the term “economy” by itself. They always used the term “political economy.” For classical economists, it was impossible to understand politics without economics or economics without politics. ... [See, for example, here, a post that while ahead of its time missed the nature and role of the rentiers.]

The current economic crisis is best understood as a crisis of political economy. Moreover, it has to be understood as a global crisis enveloping the United States, Europe and China that has different details but one overriding theme: the relationship between the political order and economic life. On a global scale, or at least for most of the world’s major economies, there is a crisis of political economy. ....

As we all know, the origin of the current financial crisis was the subprime mortgage meltdown in the United States. To be more precise, it originated in a financial system generating paper assets whose value depended on the price of housing. It assumed that the price of homes would always rise and, at the very least, if the price fluctuated the value of the paper could still be determined. Neither proved to be true. The price of housing declined and, worse, the value of the paper assets became indeterminate. This placed the entire American financial system in a state of gridlock and the crisis spilled over into Europe, where many financial institutions had purchased the paper as well.

From the standpoint of economics, this was essentially a financial crisis: who made or lost money and how much. From the standpoint of political economy it raised a different question: the legitimacy of the financial elite.

This is the question that Obama, both legacy parties, Obama's career "progressive" shills, and tout de Versailles refuse to confront. Hence the crisis in the political system in the United States today. Friedman continues:

One of the systems, the financial system, failed, and this failure was due to decisions made by the financial elite. This created a massive political problem centered not so much on confidence in any particular financial instrument but on the competence and honesty* of the financial elite itself. A sense emerged [Note lack of agency] that the financial elite was either stupid or dishonest or both ["stupid and/or evil"]. The idea was that the financial elite had violated all principles of fiduciary, social and moral responsibility in seeking its own personal gain at the expense of society as a whole.

Fair or not, this perception created a massive political crisis. This was the true systemic crisis, compared to which the crisis of the financial institutions was trivial. The question was whether the political system was capable not merely of fixing the crisis but also of holding the perpetrators responsible. Alternatively, if the financial crisis did not involve criminality, how could the political system not have created laws to render such actions criminal? Was the political elite in collusion with the financial elite?

Oh, it's fair! And skipping to the end:

This, then, is the third crisis that can emerge: that the elites become delegitimized and all that there is to replace them is a deeply divided and hostile force, united in hostility to the elites but without any coherent ideology of its own. In the United States this would lead to paralysis [or a lot worse]. In Europe it would lead to a devolution to the nation-state. In China it would lead to regional fragmentation and conflict.

These are all extreme outcomes and there are many arrestors. But we cannot understand what is going on without understanding two things. The first is that the political economic crisis, if not global, is at least widespread, and uprisings elsewhere have their own roots but are linked in some ways to this crisis. The second is that the crisis is an economic problem that has triggered a political problem, which in turn is making the economic problem worse.

The followers of Adam Smith may believe in an autonomous economic sphere disengaged from politics, but Adam Smith was far more subtle. That’s why he called his greatest book the Wealth of Nations. It was about wealth, but it was also about nations. It was a work of political economy that teaches us a great deal about the moment we are in.

How to avoid "the third crisis"? I'll post some email musings of my own, based on a question from Roger Erickson (and I'm sure I'm doing great violence to his thinking by excerpting this small paragraph:

It's an issue of getting key info to key people in key institutions, fast enough to explore adaptive options.  An inside view of the art of getting key info to key people across evolving contexts is what I'd call "maneuver context management", and what biologists call evolution.  

I responded:

Dunno about the focus on "key info to key people in key institutions."

On some days, since the world is complex, and degrees of separation work in surprising ways, I feel that plugging away day-to-day calling bullshit is the way to go; the idea that the best way to steer through a chaotic system isn't trying to model it, but to act from principle. After all, the spark (Mohamed Bouazizi) seems obvious only in retrospect.

On my "Kleptocracy on the Orient Express" days, I feel that "they're all in on it" (with exceptions, of course!) and the best way forward is out, off the train entirely. "Ambition must be made to counteract ambition" was once the motive to perform bullshit detection, but the flow of (rentier) money through the system has leveled everything and equalized ambitions across the board. See the well-known work of Outis Philalithopoulos, amply confirmed, as if it needed confirming, by Galbraith's experience at an academic conference where the presenters refused to mention the word "fraud."

And then on darker days, I feel that the looters and liars and thieves and con artists who infest and dominate our feral elites (the "looting classes") ARE the adaptive specialists, and that in a massive die-off, say -- which they are fully capable of producing, whether through climate change, or a pandemic, or famine, or war of sufficient lethality -- they will be the ones to survive in their gated Valhallas. "We're an empire now, and when we act, we create our own reality." (Growing my own food is my hedging strategy for that.)

[Note that since MMT is policy neutral, it could well be adopted in any of scenarios above, including the gloomiest.]

So, and again, "key info to key people in key institutions." I was trying to think of a society that had, in the end, thrown off a kleptocracy, and perhaps I'm wrong, but I couldn't come up with one single country. (See Jared Diamond's story in Collapse of the Norse Greenland colony that starved to death in the Little Ice Age, even eating the hooves of their horses, and in the midst of the richest fishing grounds in the world. "Vikings don't eat fish!"

But then, in the paragraph above, I conflated "society" and "country." But -- at least on the level of political economy, as opposed to the real operations of taxing and spending -- we're dealing with a transnational rentier elite, aren't we? So operating at the correct level of abstraction, there's a perfectly obvious equivalent: The Reformation, with the Catholic Church of that time playing the role of rentier. (The analogy between the sale of indulgences and collection of, say, ATM fees becomes more suggestive the more I think about it. Why do I need the intermediary, the priest? Why EXACTLY do I pay two bucks to get twenty bucks of "my own" "money"? Get a few million people to think that way whenever they're at the ATM, and the battle is won...)

So where is the church door, and what are the 99 theses to nail on it?

So, lots to think about, and clearly my own thinking is still inadequate. However, dear readers, I thought that Friedman's post, Erickson's ideas, and my own meanderings were sufficiently thought-provoking for a Sunday read.

NOTE * Note here Friedman's unwillingness to use the word "fraud." It's the eternal question: Stupid and/or evil? In Friedman's view, the crisis of legitimacy comes because the financial elite were wrong ("stupid"). In my view, the crisis of legitimacy comes because the financial elite engaged in systemic accounting control fraud ("evil"). Fortunately for me, my view of the financial elite's nature and role is supported by evidence.

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jumpjet's picture
Submitted by jumpjet on

If you look at what's taken place on the global level, it becomes painfully obvious that the neoliberal laissez-faire idea is complete bullshit. No great nation has grown and prospered without its government significantly intervening in its economy. That's pure history, repeated from the United States to Germany to Japan to China.

I think you can identify the source of the current crisis by returning to political economy, and it's something that's been touched upon here at Corrente. The source is a crisis around the idea of the nation-state. In the modern world, starting at least in the 17th Century, the fortunes of any global elite were bound up in the fortunes of the state that grounded them and gave them legitimacy. As we moved from kings and emperors to prime ministers and presidents and merchants and entrepreneurs, it stayed the same. The power of the individual was tied up in the power of the state, and a person who wished to be powerful had to make at least a modest effort to increase his or her nation's power in turn.

Now, we have a transnational elite with no real attachment to any nation-state. They have a decoupled power; some of our elite are so wealthy and powerful that they are practically nations unto themselves.

So whither the nation-state in our brave new world? The elites no longer need it, but does that mean the idea is obsolete? And if it is, how shall the plain people assert themselves in the face of sovereign elites?

okanogen's picture
Submitted by okanogen on

The Moustache of Misunderstanding?

I like how he uses this construct:

This, then, is the third crisis that can emerge: that the elites become delegitimized and all that there is to replace them is a deeply divided and hostile force, united in hostility to the elites but without any coherent ideology of its own. In the United States this would lead to paralysis [or a lot worse]. In Europe it would lead to a devolution to the nation-state. In China it would lead to regional fragmentation and conflict.

In other words "Nice little society ya got here, a shame if anything should happen to it".

So the only thing standing between "us" and the abyss, is a lying, thieving, stupid elite, that can and will screw "us" at every opportunity (and already has)?

Have I got that about right?

In that case, give me door number two, the deeply divided and hostile force without any coherent ideology of its own, because that surely can't be worse than a deeply united hostile force driven by the coherent ideology of fucking me over.

Maybe that's what they mean when they say 2% less evil.

Submitted by lambert on

... is actually Thomas Friedman.

Let's remember that things can always get worse, eh? Mad Max is a wonderful movie, but....

okanogen's picture
Submitted by okanogen on

I know TMOU is Thomas Friedman, I was making an in-joke.

Still, the point remains, he is putting forth a binary future that has no basis in even current experience. Take the Mid-East for example, the political elites in those countries lost all legitimacy, did a deeply divided hostile force create anarchy? No. We don't know what the future will hold, but I find the construct self-defeating on its face.

Is a self-delegitimized, evil, predatory elite the only thing standing between "civil" human society and a Mad Max future? Wow. Can this really be the only two options? I would like a little more information put forth before I agree with this premise which is mainly a fear-based argument.

Jessica Yogini's picture
Submitted by Jessica Yogini on

Economic development ran into a wall sometime around the 1960s-70s. The next step in economic development was primarily knowledge production. But a knowledge-centered economy requires us to do two things at the same time: compensate/motive the producers and distributors and turn the knowledge loose. No society yet is able to do this. Thus, further development was blocked in the advanced economies and investment started to shift to the catch-up economies where the old industrial structures were still functional.
What knowledge production has developed is primarily that which can be embedded in a physical product (an Intel chip, an iPod/iPad/iPhone), that which can be attached to advertising (Google), which creates its own incredible interlocking warping*, and patent/copyright based rent collection, which provides some profits but throws away most of the productivity/creativity (Microsoft). And heaven help us, advanced finance (creating illusory profit by creating artificial knowledge scarcity).
This meant that the new investment opportunities and the new jobs that should have powered our physical and cultural prosperity have not existed, even in our imaginations. We reached this stage by about 1980 or earlier. At that point, the advanced economies began to degenerate. Since then, the economy for the working class and increasing portions of the middle class has stagnated and the elite has evolved from vicious but productive to vicious and sterile and in the last decade or so into pure parasitism.
We may not have to go this deep to get societies back onto some kind of solid ground again, but this is the actual root of the matter, we will have to deal with this eventually, and the more skillfully our parasitic elite delays the start of dealing with the crisis, the deeper the level the solution will have to be.

*We are so used to the role of advertising and PR and broader information pollution that we rarely even notice that in a society awash in information, a society in which knowledge/information is the source of most real profit and advance, most of our information is delivered to us by institutions that are socially rewarded (paid) for delivering us to advertisers, not for delivering truth and enlightenment to us. In other words, our social structures all but requires that information providers pollute their products. As long as information was peripheral to the working of things, that was tolerable, but now that information is central to the economy and polity, this situation can not last.
A big part of why the current crisis is grinding so deep without even the beginning of healing is that it is more difficult for us to collectively develop new visions with so much pollution in the informationsphere.

nihil obstet's picture
Submitted by nihil obstet on

The concepts of property and of how access to resources is allotted to individuals on which our current economy is based assume scarcity. That works OK for physical commodities. As knowledge clearly became a potential source of profit, the law attempted to assimilate it to the older sources of profit and control, to make it "intellectual property."

I don't think the solution lies in a "next step in economic development" but in a genuine rethinking of how the political economy works for human society.

Jessica Yogini's picture
Submitted by Jessica Yogini on

I think we may be nearly on the same page. By "next level of economic development", I mean humanity maturing in a way that fits with the inherent abundance of knowledge production. It is not just that it does me no harm for you to have the knowledge too (unlike if you take my car), in many cases, it is of some benefit to me. In some cases, a lot of benefit to me.
The shift from scarcity to abundance will also mean a shift from exclusion to inclusion and from more competition to more cooperation. This will profoundly alter all human culture and society and individual psychology.
I don't know if the current crisis will become profound enough for this depth of maturation to become necessary. In any case, it is desirable and eventually will be necessary.

Jay's picture
Submitted by Jay on

So many of our institutions and the people who nominally "run" them have already lost their legitimacy.

Employers and corporations lost their legitimacy in the 1980s when they broke the social contract by using the recession to "downsize" regardless of whether they were profitable or not.

The US regulatory enforcement concept also lost legitimacy later on when it allowed the S&L crisis to occur, and again in the early nineties when the Fed rescued bank after bank (Citibank) due to crisis after crisis (Latin American loans, Pacific Rim collapse). Each greed-induced mess was cleaned up and inspired the next round of deregulation and "innovation." I think the big lessons learned during the Long Term Capital Management derivatives explosion and Enron collapse was that despite the logarithmic, exponential exposure to risk, there was literally no length to which the Powers that Be wouldn't go to "fix things." Those powers including the Fed, the Treasury, the SEC, the Comptroller of the Currency, the Congress, and the President. And all of those have lost their legitimacy.

The judiciary established with the OJ case that there were truly two laws in the world: one for the wealthy and one for everyone else. There probably wasn't enough evidence to convict. However, if Simpson had no celebrity and could not have afforded the best lawyers, he would surely have gone to death row. In a sense, it set the tone for a decade of civil cases where corporate giants raged rampant against impotent consumers with Godzilla-versus-Bambi resoluteness, all the while having the sheer hypocrisy to complain against "frivolous lawsuits" when 9 of 10 civil cases are brought by corporations against other corporations or individuals. Not to mention the Supreme-Court-as-Foregone-Conclusion.

Next in line was the press with its coverage of the Clenis, their coverage of George W. Bush during the campaign and the debacle in Florida. The press's credulity in giving the Supreme Court an unquestioning Good Housekeeping Seal of Approval. Their propagandizing for all of the Bush administration policies over and above the sentiment of the citizenry. The parliamentary tactics to get his tax cuts for Billionaires. The talking heads, panel experts, former Pentagon officials, "economists," etc., none of them, not a single one paid a personal price for being so wrong, indeed, they were rewarded with their own television shows and newspaper columns. Wherein they could lob softballs to administration officials, and pen love letters to "confidential administration sources." So the press is illegitimate. And circulation numbers confirm that it's fish wrapper before it even gets to its readers. No one but the most gullible believes anything that calls itself "news." We have to rely on Versailles court jester Stephen Fucking Colbert, who had the unbelievable conceitedness to to give it to us straight at his famous appearance before the Correspondent's Cotillon.

Now, academics are the newest corporate-sponsored turd-polishers to think of clever ways of explaining how starving peasants (a "Malthusian Green Initiative?") or fucking peasants (the well established institution of European nobility we prefer to call "prima notte" if you please) is really going to help the peasants. Past and present cute bullshit scams include "the Laffer curve," "trickle down economics," "free trade initiatives," "increased international competitiveness through mergers and acquisitions," "tax cuts for America's job creators," and "means testing for entitlements."

How about means testing for tax cuts? I'll leave it to the academics who will doubtless be flooding the airwaves, because plutocratic hackery is just too big a market for just the so-called "think tanks" to handle, who if you think about it are themselves conceived in illegitimacy. No, we'll soon see the dons of Harvard, Princeton, and Berkeley stooping to wipe plutocrats' figurative asses with their diplomas. On live television.

The Catholic Church has through its embrace of anti-communist plutocrats, as well as its well-established lawlessness in espousing and protecting child rape, lost all semblance of legitimacy, let alone infallibility. American Jewry is recoiling from the increasingly disturbing rhetoric of the Likudnik AIPAC, while ordinary Israelis are in open revolt (but not on TV!). The peaceful revolution in Egypt fully dispels Israel's racist politics of regional paranoia. African Americans are increasingly bewildered that the president would be doing what he is doing, and not doing what he isn't. Their bewilderment can't be dissipated forever though, and will build up in a concerted stream of fury against Democrats from top to bottom like the fire monitors of old.

The Pentagon has had about it the roaring stench of corruption about it for so long that Dwight D. Eisenhower brought it to our attention fifty years ago. But now they have disgraced their uniforms and defiled the flag they profess to love so much by instituting and making excuses for the disgraceful, un-American practice of torturing prisoners, including anal penetration of both sexes and nearly all ages. Think about that. How can you look away except in any other way than in shame. Could the chickenhawk colonels and tinpot generals get any worse?

Why yes they could, by not questioning the President's assertion that he use the United States Department of DEFENSE to kill any American citizen in any part of the world without a trial. Also by having the largest budget of all the world's militaries combined, and still protesting that they could not possibly entertain the preposterous idea of cutting their budget to something like a TRILLION FUCKING DOLLARS.

Can anyone think of a major American institution that has not compromised itself so thoroughly that we can feel magnanimous enough to lend it the benefit of the doubt, or indeed, any credence whatsoever? The American culture has been thoroughly corrupt before, for decades at a stretch even, but I can't even think of a time when every single last institution--and by implication the people who comprise them--has gone to such lengths to undermine and call into question their own reasons for existing?

Now the credit ratings agencies are downgrading our debt. Oh really. Standard & Poor's, as well as my two-year-old Siamese cat, who has approximately as much gravitas and standing with the general publich as anyone appearing on CNBC.

Oh no, the crisis of legitimacy has long past. There is a crisis when people *begin* to doubt the legitimacy of their most cherished, or at least most important, institutions.

We have met the enemy, and we have become the enemy. We are like the citizens who struggled under similar circumstances in the old Soviet Union. Everyone knows. But it's like the death of their most cherished, or at least important notions: denial, anger, depression, negotiation . . . .

What stage are you on?

Jessica Yogini's picture
Submitted by Jessica Yogini on

The depth to which reform will need to go to start the recovery depends on how long the elites who caused the crash, and whose removal is a condition for even starting recovery, can hold on. I don't know how long they can hold on and I think that situation is so non-linear that I doubt anyone can predict it.
If President Obama had nationalized the banks when he took office, then recovery might have been possible with just a shift in balance from one legacy political party to the other. But that is the stuff for an alternative history fiction. In the real world, he didn't, he didn't want to, and the elites of America, Europe, Japan, and China (at least) were incapable of such a course.
Studies have shown that recovery from financial crises can not begin until those who were responsible for creating the crisis are replaced by folks who were not. Only they will be willing to do what is required to solve the crisis. If this is true and given that all the major parties in all the leading economies are part of the current crisis-generating financial elite, this suggests that the recovery will require the replacement of all the political parties in all the advanced economies (and probably the Chinese Communist Party as well).
(And the fact that there is no major political party in any advanced nation that is willing to step up to the plate on this should give us pause. To me, it suggests strongly that our feral elites are the product of deep structural forces, not just bad luck on our part.)
But if the current elites can hold on long enough, they will drive the crisis so deep into the marrow of societies that even replacing the political elites completely (with people willing and able to reign in and dismantle the financial elites) will be insufficient.
If that happens, then the solution to the crisis may require the replacement of the "market economy" (which is actually in many important areas a rigged game having little relationship with principles of fair competition) with something else. At least for large parts of our productive activities.
This may well mean the re-emergence of the commons, neither corporatist nor statist, based on inclusion rather than exclusion.

Submitted by Hugh on

Re George Friedman's contention:

the third crisis that can emerge: that the elites become delegitimized and all that there is to replace them is a deeply divided and hostile force, united in hostility to the elites but without any coherent ideology of its own. In the United States this would lead to paralysis

I am reminded of this passage from Reinhold Niebuhr's Moral Man and Immoral Society which DownSouth liked to quote over at Naked Capitalism:

The reason why privileged classes are more hypocritical than underprivileged ones is that special privilege can be defended in terms of the rational ideal of equal justice only, by proving that it contributes something to the good of the whole. Since inequalities of privilege are greater than could possibly be defended rationally, the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interests are served by, the special privileges which they hold. The most common form of hypocrisy among the privileged classes is to assume that their privileges are the just payments with which society rewards specially useful or meritorious functions.

Niebuhr continues

If the argument is to be plausible, when used by privileged classes who possess hereditary advantages, it must be proved or assumed that the underprivileged classes would not have the capacity of rendering the same service if given the same opportunity. This assumption is invariably made by privileged classes.

In other words, Friedman is making the elite argument "Even if we loot you, you still need us." My reply is no, actually we don't.

Friedman commits other errors. For example, he raises the subject of political economy. I have no problem with that. Indeed my own analysis is based on viewing economics and politics together, and I have to say that to date my record has been pretty good. But having raised political economy, Friedman immediately reverts and talks about the economic/financial elite as if it is separate from the political elite.

I would say it is a false distinction. As I often say, kleptocracy is a system. It has financial components, political, media, and academic ones. These do not act separately. The lines between them are blurred. Where do corporations end and government begin? Or look at the personnel. Hank Paulson was chairman and CEO of Goldman and then Treasury Secretary. Does anyone seriously think he ceased to be a Goldman man when he took the Cabinet post? Or there's William Dudley who currently heads the New York Fed and was Goldman's chief economist. Same question. Or Chris Dodd. He whored for the finance industry as Chairman of the Financial Services Committee in the Senate, got one of those Friends of Mozillo Countrywide mortgages, and then retired to head the Motion Picture Association of America, a corporatist sinecure. To understand kleptocracy, you need to know the connections.

You need to remember what Friedman doesn't talk about, the vast wealth inequality in this country and around the world. How the top 1% own 50.9% of US stock, bond, and mutual funds. The bottom 50% own 0.5%. The top 10% own 90.3%. And that overall, the top 1% own 33.8% of the country's wealth. The bottom 50% own 2.5% of it. And the top 10% own 71.5%.

And he doesn't talk about the class war that is being waged against us. Again our elites are looting us. They have already produced one meltdown, and he worries they might lose their legitimacy? WTF?

okanogen's picture
Submitted by okanogen on

I can't remember where, but in a comment, Lambert asks if there is an example where a population has shrugged off its elite and re-legitimized its government (or 'political economy' in the current parlance).

Iceland apparently is an example:

In the March 2010 referendum, 93% voted against repayment of the debt. The IMF immediately froze its loan. But the revolution (though not televised in the United States), would not be intimidated. With the support of a furious citizenry, the government launched civil and penal investigations into those responsible for the financial crisis. Interpol put out an international arrest warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other bankers implicated in the crash fled the country.

But Icelanders didn't stop there: they decided to draft a new constitution that would free the country from the exaggerated power of international finance and virtual money. (The one in use had been written when Iceland gained its independence from Denmark, in 1918, the only difference with the Danish constitution being that the word ‘president’ replaced the word ‘king’.)

So this is still obviously an ongoing process.