Counterpunch.org: The Dark Age Of Money
October 24, 2012
Milton Friedman and the Rise of Monetary Fascism
The Dark Age of Money
by JAMES C. KENNEDY
If you often wonder why ‘free market capitalism’ feels like it is failing despite universal assurances from economists and political pundits that it is working as intended, your intuition is correct. Free market capitalism has become a thing of the past. In truth free market capitalism has been replaced by something that is truly anti-free market and anti-capitalistic. The diversion operates in plain sight.
Beginning sometime around 1970 the U.S. and most of the ‘free world’ have diverged from traditional “free market capitalism” to something different. Today the U.S. and much of the world’s economies are operating under what I call Monetary Fascism: a system where financial interests control the State for the advancement of the financial class. This is markedly different from traditional Fascism: a system where State and industry work together for the advancement of the State.
Monetary Fascism was created and propagated through the Chicago School of Economics. Milton Friedman’s collective works constitute the foundation of Monetary Fascism. Knowing that the term ’Fascism’ was universally unpopular; Friedman and the Chicago School of Economics masquerade these works as ‘Capitalism’ and ’Free Market’ economics.
The foundation of Friedman’s corrupting principle is that the investor (money to be more precise) has no duty, obligation or covenant to anyone or anything. Friedman’s ‘Market’ is not subject to ‘any’ human standard of morality, political limitations or national interests. Money is free to act without bounds or conventions. Nothing is prohibited as long as the market can provide a “clearing price”.
The fundamental difference between Adam Smith’s free market capitalism and Friedman’s ‘free market capitalism’ is that Friedman’s is a hyper extractive model, the kind that creates and maintains Third-World-Countries and Banana-Republics, without geo-political borders.
If you say that this is nothing new, you miss the point. Friedman does not differentiate between some third world country and his own. The ultimate difference is that Friedman has created a model that sanctions and promotes the exploitation of his own country, in fact every country, for the benefit of the investor, money the uber-wealthy. He dressed up this noxious ideology as ‘free market capitalism’ and then convinced most of the world to embrace it as their economic salvation.
As improbable as it sounds, this ideology has the near-universal support of most economists, the media, universities, the Federal Reserve, the U.S. Treasury, nearly every member of The U.S. Congress and most everyone you know. Today Friedman’s ideology is accepted, to some degree, by nearly every country in the world. But ultimately this exploitive model is not sustainable at any level, or for anyone or any nation.
The ultimate difference between Friedman’s ideology and Smith is simply this: Smith was in fact a Mercantilist. True, he opposed the custom of hording gold and other Mercantilist practices, but ultimately he was a Mercantilist. Smith promoted “free trade” with the goal of improving the English merchant’s advantage, and thus the State’s. Nothing expresses this more clearly that the title of his book An Inquiry into the Nature and Causes of the Wealth of Nations. Mercantilism is based on the relative wealth of one Nation State over the other, not the plunder of the State and it’s peoples for the benefit of the individual.
Smith believed in the power of the State and recognized that it was only by the power of the State that free enterprise could succeed and thrive. In a world without the State, he sided with Lock, “life was brutish and short”. Consequently one had obligations to the State and the people who make up the state: the working man.
According to Smith every butcher, baker, craftsman and merchant would seek out his own self-interest and that economic advantage would ultimately benefit his fellow Englishman and the Crown. Smith’s arguments against some precepts of Mercantilism were intended to give the English tradesman a greater advantage, nothing more. The intended effect was to enrich one’s State above all others as an alternative to the primitive act of war, the traditional means to National enrichment. Smith viewed things as a zero sum game. And as England was the undisputed master of global exploitation at this time, exploitation of other Nations was fair game.
However, according to Economist David Ricardo trade between nations of relative economic parity result in what he termed “Comparative Advantage”. Comparative Advantage is based on specialization: Germany builds machine equipment, Italy does leather goods, France produces cheese, wine and literature. When these nations trade with each other all parties enjoyed a net gain as a result of specialization and non-duplication of resources.
Of course this does not work when first world nations off-shore factories and jobs into subsistence-based economies (the term “comparative” is no longer germane). Off-shoring into non-comparative economies is purely extractive because all of the gains are ‘privatized and are no longer correlated to national interests. Non-Comparative off-shoring undermines both the host and source/flagship nation.
The financial entity is able to extract environmental, capital, tax and infrastructure concessions from the host nation. If the host nation ever seeks to renegotiate its position with the financial entity the entity can enlist the powers of its flagship nation (i.e. State Department). This type of intervention can be very costly to the flagship nation and end very tragically for the host nation. Under Monetary Fascism the financial entity maintains out-sized rents from the host nation by utilizing the state as its enforcement agent, while maximizing tax avoidance via off-shore corporations (and other gimmicks).
Free market capitalism, as conceived by Smith, was Nationalistic in nature and as the Nation State became wealthier, so did its people and industry. This relationship required shared obligations and shared rewards between the State and its people.
Traditional Fascism, as conceived by Mussolini or Hitler, had an aggressive Nationalistic disposition where the State promoted Industry above all others in order to strengthen the State relative to its perceived rivals. Hitler and Mussolini believed that as the State lifted industry, industry lifted the people – dignity and pride in one’s nation were foundational principles.
Monetary Fascism, as conceived by Friedman, uses the powers of the state to put the interest of money and the financial class above and beyond all other forms of industry (and other stake holders) and the state itself.
In democracies and first world nations this is achieved through lobbying, campaign donations, financial incentives, revolving door regulators and through other means. As such, the state is coopted into altering regulations / legislation, diverting investigations / prosecutions or creating tax loopholes for the benefit of the financial class/ industry. Ultimately these actions undermine states sovereignty.
For the rest of the world state interests and sovereignty are undermined through the IMF, The World Bank and other global monetary agencies.
Monetary Fascism has a strong preference for political rather than capital investments. These investments are designed to sustain and support the preferences and activities of the financial class as it manipulates and create ever larger out-sized rent opportunities or constructs risk-diverting transactions that aggregate a ‘risk-arbitrage premium’ to one side of a transaction and transfers all future losses to the other.
On a global basis Friedman’s ideas heavily influence international treaties on taxation and capital flows with the single minded goal of freeing capital from any obligation to the host or origin country. These agreements have essentially created a virtual nation, or non-nation, of money that is ultimately beyond the reach of the conventional Nation State. Friedman’s ‘invisible hand’ is free to extract the wealth of any corporation or Nation without any reciprocal obligations.
The Serene Insurrection of Money
All economic theories are devised to fill a need; to justify public and / or private actions. With the rapidly growing profits to the financial class during the divestment era, beginning in the early 1970s and continuing today, they needed some ideological justification for what they were doing (selling out America’s future and destroying corporations and jobs for quick profits) so they found and embraced Monetary Fascism. In fact, they found each other: Friedman was just ‘fulfilling a need in the market place’. Friedman simply created a new ideology that justified what the financial class was doing.
Rationalizing the divestment of an entire economy is morally deplorable, but it also offered “out-sized” profit opportunities on a massive scale. Seeking relevance in this sweeping tide of economic-cannibalism other academics rushed into the water. None bothered to consider the long term consequences that would result from the wholesale dismemberment of our industrial economy. Instead academics suddenly ‘discovered’ an implausible utopian future that would be sustained by the creative powers of finance and trading our industrial heritage for a service economy.
Shocking? – no, the academic promotion of concepts, theories, historical narratives and the state of ‘fact’ and ‘science’ are increasingly available to the highest bidder. Custom realities are also made-to-order ad nausea from within our Nation’s many tax exempt ‘think tanks’ that attempt to define public debate and guide public policy for the benefit of their patrons.
Milton Friedman and the Chicago School of economics claimed to have refined and developed modern, scientific tools of ‘free market capitalism’, capable of unlocking ever greater rewards from Adam Smith’s simple, primitive concept of free markets. Monetary Fascism was rapidly adopted because western culture recognizes the tremendous historical contributions of traditional free market capitalism and wanted to participate in the promise of these enhanced rewards.
In truth, it was nothing more than a cloak of deception – providing cover for the unscrupulous behavior of investment bankers, corporate raiders, speculators, off-shore corporation, debt mongers and bubble pushers (typically one and the same). The enhanced rewards came from the pilfering of capital investments and technology from generations past, the liquidation of employees and off-shoring of production, the pilfering of pension accounts and the termination or spin-out of R&D departments and option packages to executives and directors that focused on short term stock price targets.
Bell Labs, once part of AT&T, laid the foundation for all modern telecommunication and electronics technology today was morphed into Lucent Technology. Lucent quickly looted the legacy portfolio of Bell Laboratories to enrich themselves and shareholders, leaving a worthless shell that was eventually merged with Alcatel.
Wall Street Investment Bankers, leveraged buyout firms and hedge funds became the Paladin Knights of the ’free market’ whose allegiance was to the ‘noble shareholder’, markets and liquidity. In truth the shareholder was/is nothing more than a nameless, faceless transient in an endless pursuit of ever larger ‘outsized returns’. Traditional capital formation was replaced with financial schemes designed to acquire existing asset for liquidation, management and directors traded long term management discipline for short term performance and accounting gimmicks tied to stock and option pricing. With most of the IPO capital used to pay for the exit of early investors, the stock market has become nothing more than a series of game theory type exit strategies. The equity markets are a failed forum for the creation of productive or capital intensive projects. See Failed Capital Markets.
However, the larger system failure at the nation and global level stems from the perversion of the public and private debt market. This was made possible through massive decade’s long deregulation and the post 2008 financial crisis.
The entire 2008 financial crisis lies at the feet of The U.S. Congress. When The U.S. Congress repealed the Glass Steagall Act, passed in response to the Great Depression, they eliminated any meaningful financial oversight within the Banking and Investment Banking industry.
Why did the U.S. Congress change the law that protects our economy from a second 1930s type depression? Simple, it was campaign contributions (****-loads of cash, considered bribes or worse in the private sector), filling the top post in the Fed, Treasury and the Administration with top level executives from Goldman and the like and the prospects of private sector jobs in the financial industry for pliable regulators, retired Members of The U.S. Congress and former Presidents.
It was from the decades-long cash infused orgy of conflicted interest that Congress finally entrusted the financial industry with “self-regulation.” If you believe the rhetorical record, deregulation was intended to unleash the ‘wealth creating powers’ of these new financial instruments created through the pure genius of the investment bankers.
Alan Greenspan and others saw no limits to the potential economic contributions of the financial markets – if they could only be freed of unnecessary and burdensome regulations.
This wanton deregulation allowed the financial industry to create trillions of dollars in unregulated CMOs and CDSs (CMO: Collateralized Mortgage Obligations – packages of high risk mortgages that were rated AAA & CDS: Credit Default Swaps – bogus insurance on junk paper like CMOs) and other complex derivatives, hypothecated derivatives, synthetic derivatives, even hypothecated synthetic derivatives and the ‘black pools’ of unregulated capital that created and priced these complex financial instruments.
This resulted in the unprecedented and unsustainable accumulation of debt and related derivative instruments, literally in the hundreds of trillions of dollars, dwarfing global GDP by a number of factors, controlled by unregulated and uninhibited bankers. Ultimately it has cost most nations their sovereignty.
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Last edited by TheWholeEnchilada; 4th Dec 2012 at 19:43.