Why Treasury Secretary Paulson and His Pro-Capitalist Critics are Wrong

Last week, when the Dow plunged on the news that "blue chip" corporations were actually bankrupt because of shady get-rich investments in barely legal (for lack of government regulation) mortgage-related "derivatives" now revealed to be nothing more than pyramid "Ponzi" schemes, the public got a rare peek under the boulder of Wall Street. We saw wriggling under it the vermin in all (or at least some) of their ugliness. As we all now wonder how many more years we will have to work before we can retire with our vanishing 401-K retirement savings (oh, for the days when we used to have real guaranteed pensions), or even if we will ever be able to retire, it is galling to read how Treasury Secretary Henry Paulson (former chief executive of the huge financial firm Goldman Sachs) is orchestrating a "bailout" of the banksters that will entail taxing ordinary Americans to buy the essentially worthless assets of his Wall Street buddies to the tune of--for starters only, mind you--seven hundred billion dollars.

It's funny how, when bankers are in trouble, trillions of our tax dollars are suddenly available to bail them out, but when John Q. Public Senior needs help paying for life-saving medical care or Johnny Q. Public Junior needs help paying for college, well then there is no money to be found (except, of course, for the three trillion dollars to pay for an unjust war on the people of Iraq and Afghanistan.)

Paulson's bailout fails the "smell" test so badly that even staunch pro-capitalist experts are condemning it. For example, a Professor of Entrepreneurship and Finance at the University of Chicago, Luigi Zingales, writes in his "Why Paulson is Wrong":

"The decisions that will be made this weekend matter not just to the prospects of the U.S. economy in the year to come; they will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded? For somebody like me who believes strongly in the free market system, the most serious risk of the current situation is that the interest of few financiers will undermine the fundamental workings of the capitalist system. The time has come to save capitalism from the capitalists."

The professor is certainly correct in describing Paulson's plan as one in which "profits are private, but losses are socialized." But the professor is quite wrong in suggesting that the textbook version of free market capitalism, in which, as he puts it, "people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded," is an animal that has ever or could ever exist in the real world.

I am reminded here of a passage from a work of fiction (The Illuminatus Trilogy, published in 1975 (p. 551), if you must know) that captures the naiveté of the professor quite deliciously in a scene where a bunch of big bankers (one named Drake), a "dark hawk-faced dago" and a professor are seated at a Council on Foreign Relations banquet:

Somehow the conversation got around to a new book by somebody named Mortimer Adler...One banker type at the table was terribly keen on this Adler..."He says that we and the Communists share the same Great Tradition...and that we must join together against the one force that really does threaten civilization--anarchism!"...

There were several objections...when the hawk-faced dago spoke up suddenly. "I can put the Great Tradition in one word," he said calmly, "Privilege."

Old Drake suddenly stopped looking agreeable-but-bored--he seemed both interested and amused. "One seldom encounters such a refreshing freedom from euphemism," he said, leaning forward. "But perhaps I am reading too much into your remark, sir?"

Hawk-face ...[said] "I think not....Privilege is defined in most dictionaries as a right or immunity giving special favors or benefits to those who hold it. Another meaning in Webster is 'not subject to the usual rules or penalties.' The invaluable thesaurus gives such synonyms as power, authority, birthright, franchise, patent, grant, favor and, I'm sad to say, pretension. Surely, we all know what privilege is in this club, don't we, gentlemen? Do I have to remind you of the Latin roots, privi, private, and lege, law, and point out in detail how we have created our Private Law over here, just as the Politburo have created their own private law in their own sphere of influence?"

"But that's not the Great Tradition," said...the college professor. "What Mr. Adler means by the Great Tradition--"

"What Mortimer means by the Great Tradition," hawk-face interrupted rudely, "is a set of myths and fables invented to legitimize or sugar-coat the institution of privilege. Correct me if I'm wrong," he added more politely but with a sardonic grin.

"He means," the true beliver said, "the undeniable axioms, the time-tested truths, the shared wisdom of the ages, the ..."

"The myths and fables," hawk-face contributed gently.

"The sacred, time-tested wisdom of the ages," the other went on, becoming redundant. "The basic bedrock of civil society, of civilization. And we do share that with the Communists. And it is just that common humanistic tradition that the young anarchists, on both sides of the Iron Curtain, are blaspheming, denying and trying to destroy. It has nothing to do with privilege at all."

"Pardon me," the dark man said. "Are you a college professor?"

"Certainly. I'm head of the Political Science Department at Harvard!"

"Oh," the dark man shrugged. "I'm sorry for talking so bluntly before you. I thought I was entirely surrounded by men of business and finance."...

Drake interrupted. "Quite so. No need to shock our paid idealists and turn them into vulgar realists overnight. At the same time, is it absolutely necessary to state what we all know in such a manner as to imply a rather hostile and outside viewpoint? Who are you and what is your trade, sir?"

Quite so, indeed. Contrary to the "paid idealists" of the punditry, capitalism is not simply an economic system. It is a system of elite social control; an integral part of capitalism is its set of ideas--its ideology--that privileged elites use to defend and rationalize their privilege, and to confuse and demoralize the great mass of unprivileged. Part of the capitalist ideology is the myth that it is a system in which "people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded." To say that "capitalism needs to be saved from the capitalists" is to confuse the myth with the reality. It is as naive as a person in feudal times, alarmed at social upheavals resulting from the aristocracy's excessive greed, calling for feudalism to be saved from the aristocracy, as if feudalism were not, itself, a system of aristocratic privilege.

For most of the history of capitalism working people had to work until they died. The idea of being able to retire was won by class struggle. In the years prior to World War II the American working class took the offensive with a wave of mass strikes, including a general strike in Seattle and the great sit-down strikes in auto, that forced the ruling elite to send federal troops to numerous states to counter attack violently; Franklin Roosevelt's New Deal, with its novel reforms like Social Security, was aimed at convincing American workers to step back from the revolutionary course they were on. The capitalists are now evidently trying to take back what they grudgingly were forced to give in prior decades. Paulson's and his buddies' destruction of our retirements and their lowering of our standard of living and our expectations are not a departure from "true capitalism" but rather the very essence of capitalism. They are entirely in the spirit of the "Great Tradition."