A system built on fraud

Photo: Gage Skidmore
Photo: Gage Skidmore

A growing economy is what almost everyone expects. But a growing economy is exactly what our system cannot honestly deliver, due to resource limits. This makes both business and political fraud much more likely.

Donald Trump’s unfortunately brilliant slogan, “Make America Great Again,” encapsulates this expectation of economic growth perfectly. It has brought this dishonest bully uncomfortably close to the levers of ultimate political power. But the natural resources to make the economy grow like we want it to just aren’t there. Our resource situation today is noticeably worse than it was just two decades ago, at the end of the twentieth century. Climate change is the most obvious environmental problem that we face, but others are waiting in the wings — peak oil, mass extinctions, deforestation, antibiotic resistance, the Zika virus, and others.

Even all this environmental stress has given us at best just anemic growth. The Federal Reserve is anxiously considering whether raising interest rates (which are practically zero!) just a teeny little bit might crash the economy. In the meantime, too bad for the elephants, too bad for the desperate immigrants, and too bad for the climate.

What happens when economic growth is no longer really possible? What happens when the expectations of economic growth collide with the reality of resource limits? One plausible result is fraud — an economy built on fraudulent expectations, and a political system scrambling to keep up. In other words, business leaders and political leaders will promise what they cannot truly deliver because they have no choice: anyone who is competent and honest will be quickly weeded out. The obvious answer is that we need to change our expectations and squarely face resource limits — but the obvious answer is not something anyone wants to hear.

James Galbraith The End of Normal coverAccording to James Galbraith’s book The End of Normal, this dynamic of fraud is the real cause of the 2008 financial crisis. In other words, honest paths to economic growth were closed off due to resource limits, but the times seemed to demand economic growth, so dishonest paths were used instead, in the form of fraudulent mortgages. Just the verbiage surrounding the huge quantity of these housing mortgages is telling: “NINJA loans” (no income, no job or assets), “liar’s loans,” “neutron loans” (loans set to explode, destroying people but not buildings), “toxic waste,” and so forth. When the mortgages finally started failing, the banks started failing also, and nearly brought down the whole financial system.

Fraud is a logical solution to unrealistic economic expectations:

When resources to fuel economic growth are abundant fraudulent activities are not generally tolerated. There are opportunities for “honest profit” . . . However, when resources become scarce or expensive, opportunities for large profit for honest business are few. If the expected rate of profit — the rate that financial markets insist on as a condition for providing loans — nevertheless remains high, then fraud becomes a main channel to profitability, and fraudulent activities become part of standard practice. (The End of Normal, p. 164)

Contrast the 2008 financial crisis to the savings and loan scandal of the 1980’s and 1990’s — a time when modest economic growth was still possible. In the aftermath of the savings and loan scandal, more than a thousand industry insiders were sent to prison because of fraud. But so far, how many senior bankers have gone to prison as a result of the 2008 crisis? Zero. (p. 163)

As we moved into the 21st century, resource costs rose, but the expectation of steady growth and high profitability was still there, “powerfully embedded in the national psyche” (p. 166). There is no honest way to make the economy grow. The appearance of growth requires fraud. The bankers simply looted the institutions which they controlled by rolling up profits fraudulently.

. . . the collapse is definitive. . . . The car does not have magneto trouble . . . it has suffered a transmission failure. A meltdown. More gas in the engine will not make it go. (p. 168)

The same principles that caused fraud in the financial system also cause political fraud. We’re not talking about whether the ballot boxes have been stuffed or the election hacked (though, who knows, this may be involved too). We’re talking about the most basic election issue of all, the economy. If “the people” want plans for economic growth from their politicians, but the resource basis is lacking, they are not going to get an honest answer. The occasional honest politician will be quickly buried. In 1984 presidential candidate Walter Mondale honestly said that he would raise taxes, and was buried in a landslide.

Most people agree with Trump — that America has lost some of its former greatness. When was America great? While America for nearly fifty years after the Second World War clearly had flaws (blatant sexism, racial segregation, and Vietnam come to mind), it did have a growing and prosperous economy. Even if Trump loses by a landslide, this issue is not going away, and the possibility for a future demagogue is wide open.

If we insist on economic growth, but the resources just aren’t there, we’re going to get dishonesty at some level, possibly at many levels. Until the country can face the central fact that our economy cannot expand without destroying itself and the planet, we will not be able to deal with our real problems. Perhaps when we are peering out over the wreckage of industrial civilization, we will understand this fact.

5 Replies to “A system built on fraud”

  1. The problem is encompassed within the very creation of the corporation itself. This is an artificial entity whose SOLE purpose is garnering profit for its shareholders regardless of damage done to the living beings or planet itself. It externalizes the costs.

    As an example, my family’s farm is about to be fracked (of course I am the only one not signing on). This piece of land will be destroyed, the natural springs on the land will be destroyed, the wildlife on this land will most likely perish…all so the oil company can earn a few extra dollars for its shareholders. That is how it works, they get the profit, everyone else pays.

    Corporations have been systematically destroying everything sacred for over 100 years now. This would not be possible if the government, federal and state, were not colluding with them.

    please forgive me, but as far as I am concerned there is not a hell hot enough for the people involved in the exploitation of animals via factory farms..

    1. You raise an important issue. The cheap, easy-to-extract oil is gone, so we fall back on the more costly and more environmentally damaging technique of fracking. But it’s not just a resource shortage by itself (the end of cheap oil) that creates fracking; it’s the failure to confront the reality of shortages honestly and to continue as if growth can go on forever. If we just all said, “hey, we have a problem here, we can’t go on living the way we have been,” fracking as we know it today (and as you describe) would be ended. That’s the missing piece.

      The same general type of self-deception is probably operating in the case of factory farms. People don’t think they have a choice, and I’m not sure a hotter temperature for hell would help the operators of factory farms, nor those who reward them through their purchases, to see otherwise.

  2. Please spare me with the demonization of corporations and capitalism. The hypocrisy in the environmental and social movement is overwhelming. Before throwing stones at the “corporate capitalists”, why don’t we work on our “friends”.

    Question: What percentage of today’s “social justice” advocates are committed vegans?

    – Animal Rights
    – Environment (Global Warming/Climate Change)
    – Race (Black Lives Matter)
    – Sex (Femist)
    – Gender (LBGTQ)

    Answer: Very, very, very, very, few.

    Wouldn’t we be more effective in criticizing (actually shaming) the above groups for NOT embracing and adopting veganism as a “moral obligation” in their lives, since they are the so called “champions of justice” and have themselves been victimized by society like nonhuman animals? Wouldn’t it be wonderful if aaaalllll theeeese “social” victims would become vegan? My guess is that this country would go from being 5% vegan to about 40% vegan. So you can go ahead and criticize the greedy corporations for ruing this planet all you want (and most of them deserve it), but I think those of us who are committed to a vegan life ought to start going after our so called “friends” in other movements (environmental, social justice groups) for their hypocrisy before going after our so called “enemies” (big corporations). Let us ALL who believe in a more compassionate world and more clean planet lead by example. Be vegan: For the animals… for the planet… for your life…. for your soul.

    1. It would be wonderful if all these people became vegan. I’m not sure that “shaming” them will do the trick. That assumes that they consciously know that what they are doing is wrong, which is doubtful in most cases.

      Also, I am not interested in demonizing corporations or capitalism. The basic problem is the expectation that the economy, whatever form it takes, is going to grow. Vegans may suffer from this expectation as much as nonvegans, and it may affect socialist countries (e. g. China, former Soviet Union) as well as capitalist countries.

      1. This is precisely the problem with Corporate “capitalism”. Corporations must expand continuously, or perish, same with the money supply. My beef with corporations is that they have special rights and privileges under law that the rest of us do not have, and are allowed to loot and despoil the commons, and living beings for private profit. We also have MORE WELFARE money going to corporations than the poor by many times.

        I just got an excellent book called: “Global Industrial Complex: Systems of Domination”. The part on Animal Exploitation is excellent. It points out how animals MUST be exploited to expand empire. (eg. The American Indians being genocided and , the buffalo wiped out,so that private ranchers could graze their cattle on those lands)

        I already knew that the Big Ag was part of the Military Industrial complex at least since WW1…and that the Academy of the Sciences prostituted themselves out to corporate, as did our public school system with the “Four Food Groups” disseminated in school systems in the 1950s and which resulted in almost a doubling of meat consumption.- paid for by Big Ag- kaching!.
        I remember 2when the Dept of Agriculture was flogging dried milk for the dairy industry and telling everyone how it built strong muscles..
        Having advanced degrees in the hard sciences, and having worked in research in life sciences , I have been dismayed to witness ‘science” prostitute itself out to corporate interests repeatedly.
        This is how the corporations keep the population in the dark. It isn’t just in Agriculture, but Pharma, Banking, Etc.

        I do think we are making headway. I am Vegan, and I have two friends who have just become vegan-hopefully they will tell two friends, who will tell two friends..
        Meat consumption is down. (most poor folks actually do not have a choice in the inner cities, where any food available are almost always heavily subsidized ultra cheap processed foods loaded with animal products- fast food, and convenience store foods)
        However, Non-vegans are eating LESS meat, and it has made Tyson nervous enough to enter the plant based market.

        Did you hear the remark that Elon Musk made the other day?
        That to look for “advanced civilizations” on other planets, we should look for planets that have been destroyed like ours? Apparently the tacit assumption is that “advanced civilization” necessarily implies a devastated ecology…..(I think that needs to be challenged)

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