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Goldman Sachs And The Double Bind of Reform

July 21, 2009

“In short, the typical organization for collective action within a society will, at least if it represents only a narrow segment of the society, have little or no incentive to make any significant sacrifices in the interest of the society; it can best serve its members’ interests by striving to seize a larger share of a society’s production for them. This will be expedient, moreover, even if the social costs of the change in the distribution exceed the amount redistributed by a huge multiple; there is for practical purposes no constraint on the social cost such an organization will find it expedient to impose on the society in the course of obtaining a larger share of the social output for itself.” – Mancur Olson, The Rise and Decline of Nations

So it turns out that the media has finally realized – surprise surprise! – that Treasury has become a Goldman Sachs subsidiary. Here, Max Keiser colorfully refers to Goldman Sachs as scum:

And Matt Taibbi stumbles into some Olsonian logic in his expose in Rolling Stone:

“What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain – an extremely unfortunate loophole in the system of Western Democratic Capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.”

Taibbi’s fundamental point is right, of course; he’s just wrong to characterize it as “extremely unfortunate.” Regulatory capture is not a rare event in a democracy – it’s par for the course, because as Olson reminds us in TRaDoN:

“…small groups have a greater likelihood of being able to organize for collective action, and can usually organize with less delay, than large groups. It follows that the small groups in a society will usually have more lobbying and cartelistic power per capita (or even per dollar of aggregate income) than the large groups.”

But there is something to be learned from this. The standard political response to corporatism is policy-based; legislation must be passed in order to halt the transfer of wealth from average citizens towards the well-connected. And, if the current legislators are unwilling to enact the necessary policies, just kick them out and elect people who will.

The problem for these idealists is that the very special interests which legislation might be designed to neuter are an insurmountable roadblock to any actual reform. They have the money, they have the influence, and more importantly, they have the advantage of being focused. Goldman Sachs aren’t trying to broadly improve the lives of average Americans – they are simply trying to keep what they have. And when your average voter is ignorant about implementation details, you have a group of focused, motivated people, having their way with unfocused, apathetic people.

This problem isn’t just manifesting itself in the shenanigans of Goldman Treasury Sachs LLC, but in health reform and climate change legislation as well. Health reform could be a positive thing if it forced entrenched interests to engage of some form of cost control. But that won’t happen. And Waxman-Markey might have actually reduced carbon emissions if entrenched interests had to pay for the right to pollute. But now those permits will be given away.

There is no reform that can get rid of special interests. Voice is futile. So what should activists do? Make exit as feasible as possible. A cambrian explosion in government would do just the trick.

  1. July 22, 2009 2:50 am

    This is a brilliant tagline to describe the dominance of special interests: “organized greed always defeats disorganized democracy.”

  2. July 22, 2009 2:02 am

    Great post; even though you bridled, Will, at having our work here described as “progressive,” what I tell my progressive friends about special interests is that not only do we libertarians agree with all of their criticisms of corporate self-interest corrupting government, but that we actually believe that the situation is WORSE THAN THEY THINK. It has always struck me as bizarre that the left accuses us of defending corporate interests when understanding the ineluctable logic of public choice theory is largely why I shifted from the left to liberatarianism. As you point out, the odds are that every expansion of government will, sooner or later, be captured by special interests.

    And then, of course, I ventured out beyond standard minarchism because, precisely as you say, the logic of public choice applies all the way to the end. There is no escape other than “Letting a Thousand Nations Bloom.” I have often thought libertarians naive about deregulation when they were surprised that the S&L crisis occurred in the 1980s when deregulation went wrong, they were surprised when the 1990s California electricity deregulation went wrong, they are surprised that financial deregulation went wrong, etc. The process of deregulation is just as subject to “regulatory capture” as is the process of regulation. In both directions, odds are that the outcome will be captured by special interests. This doesn’t mean that libertarians should not support deregulation in domestic policy; it is still can go right, as with airline deregulation. But it does mean that libertarians should take seriously the fact that public choice theory applies to every aspect of government policy, and that we will see the complete set of benefits of free enterprise only when legal system creation itself becomes an act of competitive free enterprise.

  3. islander permalink
    July 21, 2009 4:05 pm

    “Health reform could be a positive thing…”
    “…reduced carbon emissions…”

    Individualist sense tingling….


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