Ultimately, the guideposts of a market-based society never
seem to progress beyond tautology: policies that advance
markets are good and efficient because they advance
Kevin Phillips, from Wealth and Democracy
As you may have heard too often already, the French historian and social theorist Michel Foucault posited an iron law of cultural hegemony. Local contests and assertions of power, according to him, feed into networks. Cliques, coalitions, institutions, regimes, and social classes channel the friction and flatten orbits into overall strategies of domination. Social structure is power consolidated, including control of wealth. To sustain power, elites are said to create a thick cultural overlay, “hegemonic discourse,” that shapes what will be thought and expressed. Its purpose is to make what goes on seem correct. When it is working well, this nefarious process fills people’s consciousness with myths, images, spectacles, codes, bodies of knowledge, and assignments more beguiling than the raw power formation they mask.
The United States is a business society and always has been. Does it fit Foucault’s model—regularity of social relations interlocked with a sophisticated mystique?
The short answer is no. Americans are predictable, very predictable, in their social behavior but erratic in justifying it. This could be interpreted in several ways. All theories, including Foucault’s, tend to come up short against reality. America is too crude to suit a European model. And so on. It is more interesting, though, to explore the native pattern in its own right.
Certainly commercialism generates a fair amount of regularity. For example, when a non-commercial or anti-commercial movement or organization emerges, it is immediately scanned as a business opportunity—for the sale of legal services, counseling, gear, memberships, and material exploitable by the news and entertainment industry. Money-free zones are hard to find in the social landscape, only features more saturated or less saturated with commercialism. To take another example, booms and busts occur repeatedly. Booms involve overconfidence in technology, loose credit, excess capacity, manipulation and swindling, goldrush fever. Busts involve loss, bankruptcy, unemployment, and panic. Safeguards are installed too late to prevent busts and removed too soon to prevent booms. It’s the way we do things.
Certainly too there are, in some areas of American life, mystifications such as Foucault had in mind, regarded as sacrosanct without awareness of their background. The American lawn, for instance, began with the rich trying to imitate English estates in the wrong climate, whereupon the merely well-to-do took it up in a wave of second-hand snobbery. The U.S. Department of Agriculture, the Garden Club of America, real estate dealers, landscaping firms, and zoning boards then pushed the lawn farther down and across the class system. Today about $25 billion per year changes hands for seed and fertilizer, pesticides and water, mowing equipment and gasoline. By weight, grass clippings make up the nation’s biggest crop. Multitudes, oblivious to origins, profits, and waste, now identify lawn care with civilization.
On balance, however, Americans are poor at mystification. Cover stories on a par with those developed where the cultural overlay was thicker—say afterlife, courtly love, wheel of dharma, proletariat—are hard to come by. Economics, thoroughly mathematized, is indeed mystifying, comparable to priestcraft. Yet when economists lapse into ordinary language, they could be mistaken for comedians. Given the recurrence of booms and busts, their term “market efficiency” borders on facetiousness, like calling a gun that never shoots straight “Old Trusty.” In any case, the lay audience for studies of booms and busts only seeks clues to timing. Given a chance, they intend to run through the cycle again, this time jumping in sooner and pulling out earlier.
Thus in the United States a home grown model has to be substituted for Foucault’s linkage of power and well-wrought symbolic culture. Behavior is closely attuned to the mobility of capital but haphazardly combined with an uneven cultural overlay.
Steady behavior and wobbly explanations. A venerable pattern in America.
During the Revolution savvy investors made a fortune from privateering: they and raiders they backed seized or robbed approximately 3000 British ships. The pickings from their own side were not bad either. Between 1775 and 1777 Robert Morris as head of a congressional procurement committee awarded 25 percent of the contracts to his own firm. Timothy Pickering, quartermaster of the Continental army late in the War for Independence, maintained that corruption almost doubled government debt beyond what it should have been. That hundreds of men were ready to spot and exploit such opportunities reflected trends in motion since early in the 18th century. When Benjamin Franklin was a young man, middling artisans and tradesmen such as himself held about 17 percent of Philadelphia’s recorded wealth. When Franklin retired from business he was the largest paper dealer in British North America, and the proportion of wealth possessed by middling folk in Philadelphia had dropped to 5 percent.
It was business as usual after the Revolution. As word spread to insiders of Alexander Hamilton’s plan to redeem both federal wartime loans and state debt certificates at face value, they bought all they could for as little as ten cents on the dollar. Of the redemption paid out in 1795, estimated to equal 12 percent or more of gross domestic product, speculators received about half. From 1820 into the 1850’s workmen’s parties and anti-bank protesters denounced concentration of wealth. All along, however, they were stymied by the business cycle. At first expanded output, westward migration, “democratization” of private property, and government subsidies to infrastructure entrepreneurs bought off protest. Then a mania for railroad stock—during which trading volume increased and buying on margin was introduced—brought on the Panic of 1837 and a long depression. The number of people receiving charitable aid in New York City more than doubled in one year.
The Civil War offered glorious business opportunities: a profit rate of 40 to 50 percent for private contractors paid by the Union. Speculators who bought government bonds with greenbacks turned a profit of 100 percent or better when Congress mandated redemption in gold. In 1860 the South held 30 percent of the nation’s assets. Destruction, looting, emancipation, and currency collapse caused great losses during the war and its immediate aftermath, but carpetbaggers contributed substantially to lowering the figure to 12 percent by 1870.
With profits well in hand and the industrial machinery humming, another speculative mania funneled reckless loans to overbuilt and overpriced railroads. Numerous financiers, banks, brokerage houses, and 5000 other firms went broke in the Panic of 1873. By 1876 half the railroads in the U.S. were in receivership. An estimated 3 million workers were unemployed in 1874, and the steel industry took a decade to recover.
In this first century the justifications offered for what went on were thin. Jefferson, who eloquently praised the independent farmer and self-sufficient craftsman, was himself a large landowner, slaveholder, and debtor. Andrew Jackson, a sort of American condottiero, rallied the “common man” against the “money power” without noticeable effect on social structure. Students of American inequality estimate that in major towns in the time of “Jacksonian democracy” 90 percent of the rich came from families that were already wealthy or eminent.
Religion still carried tremendous cultural weight, and efforts were made to borrow its prestige for business purposes. Orators claimed that the self-made go-getter was a particularly choice specimen of God’s handiwork. Horace Bushnell, a well-known Protestant minister, assured his congregation that wealth was a sign of God’s approval. Catholics had long since worked out a story about fiduciary responsibility for Christ’s patrimony. All things considered, however, religion was an awkward prop for dog-eat-dog capitalism. Christ stood for compassion and sacrifice. Jesus championed the poor and meek. The Bible condemned filthy lucre. “Invisible hand,” not yet scientized by economists, sounded like a poetic turn of phrase or else something worshiped by savages in the bush.
Cloaking business expansion and land grabs in phrases such as Manifest Destiny, taming the wilderness, spreading civilization, and the like was often combined with religious cant. Certainly such sentiments had wide appeal, much as “growth” and “development” do now. The appeal, though, was based on a common understanding that it meant getting hold of ore, timber, grazing land and plow-land, trade and manufacturing sites, and building lots.
Concentration of wealth reached breathtaking proportions over the next half-century. Standard Oil of Ohio was capitalized at $1 million in 1870; by 1880 the Standard Trust refined 95 percent of the country’s oil and was approaching a value of $300 million. By swallowing a number of smaller firms, General Electric reduced competition and by 1892 was said to be worth four times more than its parts separately. Over 300 large monopolies, cartels, and trusts formed between 1894 and 1900. A corresponding disparity in personal wealth was only to be expected. In 1890 the ratio between uppercrust wealth and median-family wealth reached around 300,000 to one.
Supported by a national banking network and a greatly enlarged money supply, facilitated by the telephone and the ticker tape, and driven by gambling fever, the New York Stock Exchange had its first million-share day in 1886. The money men’s favorite casino, the Saratoga Club, was owned by a fellow speculator who turned a $2 million profit on Reading Railway stock.
As befitted a consolidating industrial power, the people’s representatives in this period organized themselves on a bigger and more efficient basis. Thirty members of the New York state legislature, for instance, sold their votes as a bloc. At Boss Tweed’s trial, the prosecutor put into evidence a meticulous and comprehensive ledger that showed the kickbacks agreed to by each party granted a city contract and recorded the payments as they flowed in.
Naturally the Gilded Age produced busts commensurate with its booms. In the Panic of 1893 nearly 16,000 businesses failed, including companies that controlled a third of the U.S. railroad system. A so-called Rich Man’s Panic followed in 1902—3. Lack of a central bank figured in the Panic of 1907, convincing even J. P. Morgan that a government currency and reserve system was desirable.
Thus behavior held steady in the Gilded Age—overproduction and overinvestment, maldistribution of income, tax breaks for the rich, corrupt politics, and crashes. What changed, for the time being, was the quality of discourse. Two impressive justifications emerged. One was economics as a formal discipline with scientific overtones, now separated from old-fashioned political economy and bolstered with terms such as marginal utility, diminishing returns, economy of scale, and externalities. Some members of the guild went so far as to say that unemployment was just a misunderstanding. Lower wages far enough and it would disappear. The other justification was social Darwinism. In relation to what Darwin himself had really said about natural selection, social Darwinism was more like a boy’s fantasy of two storybook tigers, Fang and Devil, locked in a death struggle; but of course it was given a grown-up gloss, and its proponents benefited from using Darwin’s name.
Enemies of profiteering responded with enriched discourse of their own, about the reserve army of the unemployed, for example, and, as Theodore Roosevelt said, the right of a community to regulate property “to whatever degree the public welfare requires.” For once, not long before World War I, American behavior and American discourse reached equilibrium. Thorstein Veblen, a Yale Ph.D. economist, summarized society as chicanery in business and plunder in government. “Freedom from scruple,” Veblen wrote, “from sympathy, honesty, and regard for life, may, within fairly wide limits, be said to further the success of the individual in a pecuniary culture.”
The excesses of the 1920’s were horrendous but not different in kind from what had gone before. War profits heated up the economy just prior to 1920. The price of Bethlehem Steel shares, for example, rose from $33 to $600. Evidence of juicy frauds turned up after the war, as in the case of $1 billion paid for aircraft that were never delivered.
As the Jazz Age took shape, technological fantasies again fueled speculation, this time involving automobiles, utilities, broadcasting, and household appliances. Debt soared. By 1929, as noted by Kevin Phillips, “extending credit to consumers had become the nation’s tenth biggest business.” Through mergers and holding companies about a fifth of the country’s commercial assets shifted from private ownership to control by public corporations. As playing the stock market became a national sport, banks jacked up prices by buying shares in huge quantities and retailing them at a higher price to a gullible public impressed with the upward trend. All along, of course, the rich pressed Congress to reduce taxes. Four cuts were enacted between 1921 and 1928. Millionaires were clamoring for another one just before the crash of 1929.
The Great Depression produced by the Roaring Twenties was perhaps the worst in modern history but also very much in the American tradition. Construction, steel, farming, banking, real estate, and consumer durables went down the tube. Industrial production and corporate profits did not regain their 1929 level until 1940.
In terms of the pattern under scrutiny here, the 1920’s were more typical of America than the Gilded Age. Radical protests were drowned out by advertising and business pieties. Sophisticated counter-theories would circulate in the 1930’s, such as Keynesianism and dialectical materialism, but by then it was too late. During the 1920’s the tone was set by the likes of President Coolidge: “The man who builds a factory builds a temple. The man who works there worships there.” Popular author Bruce Barton informed the world that Jesus was a swell salesman. Such pronouncements were what made the dialogue in the novels of Sinclair Lewis hilarious. He had an ear for the prattle that “boosters” talked to each other.
The “momentum” boom of the 1990’s and the slump that followed combined the elements of the great tradition. The boom itself was a replay of the 1830’s, 1890’s, and 1920’s: naive enthusiasm for technology, frenzied speculation, grand swindles and bogus accounting, and an obscene gap between the rich and the poor. As always, multimillionaires clamored for tax cuts. The current slump also resembles earlier ones: layoffs, bankruptcies, deficits, and painful devaluations. Recall that in the Panic of 1893 about 16,000 businesses failed. And once more the justifications offered for the social framework in which such things happen are flimsy. Market fundamentalists supplicate Alan Greenspan to combat evil spirits.
Numerous individuals and institutions have been hurt by the slump, including several wealthy ones. In their zeal to blame somebody, investigators and prosecutors have uncovered a certain amount of outrageous extravagance. Dennis Kozlowski, former Tyco International CEO charged with tax fraud, evidently bought a $6000 shower curtain with company money. Kenneth Lay, who presided over Enron when it was the darling of Wall Street and pension fund managers, reportedly sent a company jet to France to bring a mattress home for his daughter. Given the casualties and given such sensational material, the news media are running more stories and longer stories than they used to about business chicanery.
Rarely is anything said about the momentous transfer of wealth from shareholders to executives during the 1990’s. Yet through these stories it is possible to get a sense of the cheating intrinsic to a commercial society. Not just workaday tactics to wring a few extra bucks from customers, suppliers, and investors. Rather, deeply embedded practices that contribute to booms and busts. The abundance of stories helps one to better picture levels of cheating.
The lowest rung on the ladder of cheating is occupied by those who outright take for themselves money that belongs to or is entrusted to the organization for which they work. They don’t negotiate for it, as they might a golden parachute. They don’t construct an internal financial system and a corporate culture that overcompensates them. They just grab it.
Recently in New York a Harvard Business School graduate who ran a money management firm and frequently appeared on television played the stock market with funds on deposit with his company. When he won, he put the profits in his personal account. When he lost, he debited clients’ accounts. He made about $6.7 million before he was caught and convicted, and they lost about $56 million. In Arizona a ring of executives in charge of a church foundation sold securities and retirement planning to the faithful, who were promised a high yield and that the fees charged would go to worthy causes. In fact, however, the ring siphoned off many millions for themselves and bankrupted the foundation, at the expense of more than 10,000 mostly elderly investors.
This bottom rung is a bad place to be. Directors, co-executives, lawyers, and publicists might be willing to shield one of their own who chiseled for the good of the firm. A purely selfish transgressor by contrast is an embarrassment whose swindle too closely resembles pilfering by hourly workers. It is almost better to be known as a stupid businessperson on the up-and-up. The outside auditors of the Arizona foundation, for example, may or may not have looked the other way, but they had records proving they put in the customary hours, charged their customary amount, and counted all payments as revenue for their company. When they ponied up a $215 million settlement under pressure from the state attorney general, it was done “legitimately” by officers acting “properly” on behalf of the firm.
Perched on the next rung of cheating are mercenaries—business teams that will hurt people for money. The trick pulled by a large pharmaceutical company with a drug that extends the life of cancer patients illustrates the type. The federal government, which developed the drug at a cost of $32 million, granted the company exclusive marketing rights for five years—so that the medication would be immediately manufactured and distributed (though at a very high price) while other laboratories sought a cheaper version. Just before the grant expired, the company entered into a sham lawsuit with a smaller firm to exploit a loophole in federal regulations that keeps any generic version off the market for up to 30 additional months while a suit is in progress. Company: $1 billion to $2 billion extra revenue. Patients, science, government, and competitors: $0.
Separate brigades of mercenaries are capable of joining in a well-coordinated business offensive so long as each is guaranteed a looting opportunity. Not long ago one of America’s premier brokerage houses contracted to underwrite an initial public offering of shares in several telecommunication corporations. While the broker’s star analyst praised the stocks to the sky, a sweetheart allocation of shares was made to top executives at established telecommunication companies with which the broker already did business. For the firms they headed, these pet clients ordered a large amount of equipment from the newly launched companies, which gave the analyst grounds for continuing to beat the drum. Those in the know then unloaded their shares on the public before the price plummeted.
On still a higher rung stand those who turn their careers into a business regardless of the larger businesses through which they pass. They choose to help or hurt the enterprises they join according to which choice promises to yield the greater benefit to them individually. Business as a whole they may regard as merely a tedious means of gathering a war chest for trying their luck in politics or some other arena of celebrity.
George W. Bush is an example. His dealings as a director and member of the audit committee at Harken Energy in quieter days were summarized by Paul Krugman in The New York Times as follows:
In 1986 one would have to consider Mr. Bush a failed businessman. He had run through millions of dollars of other people’s money, with nothing to show for it but a company losing money and heavily burdened with debt. But he was rescued from failure when Harken Energy bought his company at an astonishingly high price. There is no question that Harken was basically paying for Mr. Bush’s connections.
Harken did badly. But for a time it concealed its failure— sustaining its stock price, as it turned out, just long enough for Mr. Bush to sell his stock at a large profit—with an accounting trick identical to one of the main ploys used by Enron a decade later. (Yes, Arthur Andersen was the accountant.). . . . The ploy works as follows: corporate insiders create a front organization that seems independent but is really under their control. This front buys some of the firm’s assets at unrealistically high prices, creating a phantom profit that inflates the stock price, allowing the executives to cash in their stock.
That’s exactly what happened at Harken. A group of insiders, using money borrowed from Harken itself, paid an exorbitant price for a Harken subsidiary, Aloha Petroleum. . . .
The former CEO of what was once the country’s second largest long-distance provider is perhaps the best example of all—both a good businessman and a bad one as incentives warranted. For years he built and expanded an outstanding firm. Recently, however, his handpicked financial officers were caught overstating profits by billions of dollars. About 17,000 workers were subsequently laid off. Out of a huge loan from the company to keep him from dumping stock to meet a margin call, the CEO reportedly spent $3 million on gifts to friends and family. He is now said to be looking for “a new challenge.”
One understands. He is like the star who appears in a stinker of a movie because the part pays her so well. Yes, the checks come to her, but she has to support an entourage—agent, tax advisor, publicist, secretary, ranch manager, bodyguard, housekeeper, etc. She, not the production company that put out the movie, is the business that matters.
In the interpretation of pecuniary culture offered here, the 1990’s were a normal period. Business behavior has hardly changed in 200 years. At the same time—and this is normal too—each boom and bust produces insufficient and implausible explanations.
Currently, as scandals are uncovered week after week, the news media frame them as episodes in a crime spree, something exceptional on the order of a rash of kidnappings or serial killings. By implication, business malfeasance is the work of a few tycoons crazed by supreme power—the Nero theme. Or else it consists of the wild doings of mad outlaws—the Bonnie and Clyde theme.
The Nero theme perhaps works for Dennis Kozlowski and his $6000 shower curtain. The bandit theme certainly works for Martin Frankel, who looted $200 million from insurance companies he controlled, who filled up one of his mansions with young women, and who was captured in a hotel room with a stack of fake passports and a fortune in diamonds. Day in and day out, however, the bulk of the damage is done by boring men in blue suits who retire to Naples, Florida, with eight million “legitimate” dollars and play a lot of golf. Some unlucky or reckless aspirants never make it of course, but their crimes, if exposed, are about as thrilling as balancing a checkbook. Two Credit Suisse First Boston executives, for example, allotted hot IPO shares to investors who agreed to share the profits through inflated commissions on other trades. Some perpetrators are rather humble, forlorn souls with only a toehold in the executive class. The currency trader who lost $691 million of a Baltimore bank’s money and falsified records to cover up the loss told the court that he simply wanted to go on receiving annual performance bonuses.
To freshen things up when the bandit and crazed-emperor motifs get stale, the media occasionally imply that an epidemic has struck. Respectable citizens, so the story goes, have suddenly been invaded by a mysterious virus of greed. This doesn’t hold up either. The Association of Certified Fraud Examiners estimates that the volume of business fraud has stayed at the same rate for at least the past seven years. Although executives steal larger amounts, 58 percent of frauds are carried out by rank-and-file employees.
Once again consistent behavior and wobbly explanations. Although opportunities and penalties for cheating differ by class, pecuniary culture is the common culture, with a grip on ordinary people at many levels. Recently two FBI agents were arrested for peddling confidential information about companies in regulatory or criminal trouble to a Wall Street speculator looking for stocks to sell short. In Vermont one Stewart Fuller was charged with looting his neighbors’ house and holding a three-day yard sale of their possessions while they were away on a trip. In Connecticut a woman allegedly recruited children to collect money by posing with her as the grieving family of a man killed in the collapse of the World Trade Center. Explanations come and go in the media. Recall when “welfare queens” were supposed to be amassing wealth. Yet news as a commodity drifts along in a constellation of values, habits, and arrangements that influence generation after generation. Pecuniary culture is tradition, not news.
In a sense flimsy explanations are a boon to Americans. They may be disregarded so that attention can be paid to the actual conditions under which people operate. By way of analogy, living in a tropical lowland entails coping with heat, humidity, rank vegetation, dangerous insects and bacteria, and this is true whether the intention is to make the best of it, just get by, or resist and counter the setting. Culture is “physical” too. A statement given to The New York Times by a doctor who specializes in fatigue management makes the point. “Every segment of our culture,” he said, “is now working round the clock: health care, transportation, public safety, technology, economics and banking, convenience stores and gas stations. People are getting less and less sleep, and their body clocks are more disrupted. Drowsy driving is the consequence.” Drowsy driving in turn is estimated to cause 1.2 million accidents per year.
When Veblen talked about chicanery, he was describing, not moralizing. In a market society it is always there, a risk to all, like malaria.