The Path to Human Development: Capitalism or Socialism?

The Article: The Path to Human Development: Capitalism or Socialism? by Michael A. Lebowitz in the Monthly Review.

The Text:

Preface

If we believe in people, if we believe that the goal of a human society must be that of “ensuring overall human development,” our choice is clear: socialism or barbarism.

These concluding lines from “The Path to Human Development” appear on the back cover of one Venezuelan edition—a pocket-sized edition much like the widely circulated “Socialism Does Not Drop from the Sky” (chapter 5 of Build It Now). The other edition, together with an extended edition of that latter essay (including my “New Wings for Socialism” from the April 2006 Monthly Review), is being published as The Logic of Capital versus the Logic of Human Development for the communal council libraries in Venezuela.

Both editions depart from the traditional format for books (and Monthly Review) because of the numbering of sections and paragraphs. There is a reason for this. While the analysis of capitalism and the presentation of a socialist alternative are there for individual readers (for whom the numbers are unnecessary), collective readers are the real target for this work. In other words, “The Path” has been prepared to support educational and political discussions in Venezuela (in, for example, trade unions, communal councils, and socialist formations). Numbering sections and paragraphs facilitates this kind of discussion. In short, this work is not at all intended as an end product to be consumed by an individual passive reader; rather, its purpose is to be a means to encourage collective struggle against capitalism and for socialism. As the line which precedes those quoted above indicates, “we know we have to be prepared to fight.”

Obviously, it is not only in Venezuela that we have to be prepared to fight for a society which permits the full development of human beings. As an example of the important work it does, Monthly Review’s policy of placing its articles online will make it possible for organizations to make whatever use of “The Path” they think may help the struggle. I think that this is one of the many contributions that the people at Monthly Review regularly make through the Press and now MRzine. In my talk about the booklet at the Venezuelan Book Fair last November, I quoted Bertolt Brecht, “reach for the book: it is a weapon,” and noted that “The Path” was written to be a weapon. In the struggle against barbarism everywhere, we need many weapons.

What do we want?

1. What do we all want? We want to be all that we can be. And we want this not only for ourselves. We want our families and our loved ones to be able to develop all of their potential—that we all get what we need for our development. To each according to her need for development.

What do we need for our development?

2. There are two points, though, that we need to stress. First, if we are going to talk about the possibility of human development, we have to recognize that a precondition for that development is sufficient food, good health, education, and the opportunity to make decisions for ourselves. How can we possibly develop all our potential if we are hungry, in bad health, poorly educated, or dominated by others? Secondly, since we are not identical, what we need for our own self-development obviously differs for everyone.

A society that stresses the opportunity to develop our potential

3. The idea of a society that would allow for the full development of human potential has always been the goal of socialists. In his early draft of the Communist Manifesto, Friedrich Engels asked, “What is the aim of the Communists?” He answered, “To organize society in such a way that every member of it can develop and use all his capabilities and powers in complete freedom and without thereby infringing the basic conditions of this society.” Marx summed it all up in the final version of the Manifesto by saying that the goal is “an association, in which the free development of each is the condition for the free development of all.” Our goal, in short, cannot be a society in which some people are able to develop their capabilities and others are not; we are interdependent, we are all members of a human family. The full development of all human potential is our goal.
Where does human development come from?

4. Human development, though, doesn’t drop from the sky. It doesn’t come as the result of a gift from above. It occurs through the activity of people themselves—through what Marx called revolutionary practice—“the coincidence of the changing of circumstances and of human activity or self-change.” We change ourselves through our activity—through our struggles and through everything we do. The way we produce (in the workplace, in the community, and in the home), the way we relate to others in our activity, the way we govern ourselves (or are governed by others)—all these make us the people that we are. We are, in short, the product of all our activities.

The common sense of the Bolivarian Revolution

5. Every Venezuelan should recognize these ideas—they are at the center of the Bolivarian Constitution of Venezuela. In its explicit recognition (in Article 299) that the goal of a human society must be that of “ensuring overall human development,” in the declaration of Article 20 that “everyone has the right to the free development of his or her own personality,” and in the focus of Article 102 upon “developing the creative potential of every human being and the full exercise of his or her personality in a democratic society”—the theme of human development pervades the Constitution.

6. Further, the Constitution also focuses upon the question of how people develop their capacities and capabilities—i.e., how overall human development occurs. Article 62 of the Constitution declares that participation by people in “forming, carrying out and controlling the management of public affairs is the necessary way of achieving the involvement to ensure their complete development, both individual and collective.” The necessary way—practice, protagonism.

7. And, the same emphasis upon a democratic, participatory, and protagonistic society is present in the economic sphere, which is why Article 70 stresses “self-management, co-management, cooperatives in all forms” and why the goal of Article 102, “developing the creative potential of every human being,” emphasizes “active, conscious and joint participation.”

The 1999 Constitution as a snapshot of the balance of forces at the time

8. But that Constitution was not exclusively devoted to the goal of human development. It retained the support for capitalist institutions of earlier constitutions—with its guarantee for private ownership of the means of production (Article 115), its identification of a role for private initiative in generating growth and employment (299), and its call upon the state to promote private initiative (112).

9. Further, that constitution included that special condition desired by finance capital’s policy of neoliberalism—the independence of the Central Bank, which imperialism wants in the constitution of every country because it proclaims that it is not elected governments that should make critical decisions about an economy but bankers and those under their influence. Very simply, the 1999 Bolivarian Constitution was a snapshot of the balance of forces at that time: it contained a capitalist element and an element oriented to the full development of human potential.

10. But, were these elements compatible? Can you have that overall human development with capitalism? Can capitalism be a path to human development?

The logic of capital

11. Think about capitalism. In capitalism, the logic of capital dominates; and that logic goes counter to the needs of human beings for their own development. In capitalism, the goals of production are the goals of capital for profits. For capital, human beings and nature are just means to that goal.

Capitalists and workers

12. Consider the nature of capitalist relations of production. There are two central aspects—the side of capitalists and the side of workers. On the one hand, there are capitalists—the owners of wealth, the owners of material means of production. And their orientation is toward the growth of their wealth. Capitalists purchase commodities with the goal of gaining more money, additional value, surplus value. And that’s the point, profits. As capitalists, all that matters for them is the growth of their capital.

13. On the other hand, we have workers—people who do not own the material means of producing the things they need for themselves. Without those means of production, they can’t produce commodities to sell in the market to exchange. So, how do they get the things they need? By selling the only thing they do have available to sell, their ability to work. They can sell it to whomever they choose, but they cannot choose whether or not to sell their power to perform labor if they are to survive. Capitalism requires people who must sell their power to produce in order to get the money to buy the things they need.

The sale of labor-power

14. But the separation of the means of production from producers is not enough for labor-power to be sold. If workers are separated from the means of production, there remain two possibilities: (1) workers sell their labor-power to the owners of means of production or (2) workers rent means of production from those owners. As we will see below, only the first case creates the conditions for capitalist production.

15. Who decides? Who decides which of the two possibilities it will be? The owners of the means of production, the capitalists decide. Owning the means of production ensures that you have the power to decide. The capitalists can decide how to use their property to achieve their goal. If they choose to take possession of production themselves, then the only way that workers can survive is by selling their capacity.

16. But, why does the capitalist decide to buy labor-power? The capitalist buys the right to dispose of the worker’s capacity to perform labor precisely because it is a means to achieve his goal, profits. Only the growth of his capital interests him as a capitalist. Once the capitalist has purchased the worker’s capacity, he is in the position to compel the worker to produce profits.

The market exchange between capital and workers

17. We now have the basis for an exchange between two parties in the market, the owner of money, and the owner of labor power. The worker needs money, and the capitalist needs the worker’s power. Each of them wants what the other has; it looks like each will get something out of that exchange. It looks like a free transaction. Many people look at the transactions that take place in the market and declare, “we see freedom.” After all, no one forces you to engage in a particular exchange; you could freely choose to starve instead.

18. What makes this market transaction differentfrom the sale of any commodity? True, the worker has no alternative but to sell what she has, but that is often true of a peasant or craftsman too. What is different is what happens next; something very interesting happens to each of the two parties to that transaction. Marx commented, “He who was previously the money-owner now strides out in front as a capitalist; the possessor of labor-power follows as his worker.” And where are they going? They are entering the workplace; they are entering the place where the capitalist now has the opportunity to use that property right which he has purchased.

The logic of capital in the sphere of production—workers controlled by capital

19. Two central characteristics typically occur in the process of production that takes place under capitalist relations. First, the worker works under the direction, supervision, and control of the capitalist. The goals of the capitalist (i.e., the search for profits) determine the nature and purpose of production. Directions and orders in the production process come to workers from above. There is no market here. There is a vertical relation between the one who has power and the one who does not. It is a command system, the despotism of the capitalist workplace.

20. And why does the capitalist have this power over workers here? Because he purchased the right to dispose of their ability to perform labor. That was the property right he purchased. It was the property right that the worker sold and had to sell because it was the only option available if she was to survive.

Workers without property rights

21. The second characteristic of capitalist production is that workers have no property rights in the product that results from their activity. They have no claim. They have sold to the capitalist the only thing that might have given them a claim, the capacity to perform labor. It’s not like producers in a cooperative who benefit from their own efforts because they have property rights to the products they produce. When workers work harder or more productively in the capitalist firm, they increase the value of the capitalist’sproperty. Unlike a cooperative (which is not characterized by capitalist relations of production), in the capitalist firm all the fruits of the worker’s productive activity belong to the capitalist. This is why the sale of labor-power is so central as a distinguishing characteristic of capitalism.

Exploitation of wage-laborers

22. What happens, then, in the sphere of capitalist production? It all follows logically from the nature of capitalist relations of production. Since the capitalist’s goal is surplus value, he only purchases labor-power to the extent that it will generate that surplus value. After all, he’s not in the business of charity.

23. In order to understand the generation of surplus value, think about what workers normally buy—in other words, what they need to maintain themselves at their existing standard of living, i.e., the average real wage. Based upon the general level of productivity in the society, we can calculate how many hours of daily labor are required to produce that real wage. For example, at a given point, the daily wage might embody 6 hours of average labor—6 hours of “necessary labor”; it means that on average, it takes 6 hours of work to produce the equivalent of that wage.

24. Of course, the capitalist has no interest in a situation in which workers work only long enough to get their equivalent. What the capitalist wants is that workers perform surplus labor—i.e., that the labor performed by workers (the capitalist workday) exceeds the level of necessary labor. The necessary condition for generation of surplus value is the performance of surplus labor—i.e., more labor than the labor contained in what the capitalist pays as wages. The capitalist, through the combination of his control of production and his ownership of the product of labor, will act to ensure that workers add more value in production than the capitalist has paid them. The difference between the total labor they perform and the labor equivalent in their wage (in other words, a difference which is their unpaid labor) is exploitation.

Capital’s laws of motion

25. So, you can be certain that the capitalist will do everything possible to increase the ratio between surplus labor and necessary labor, the rate of exploitation (or, in its monetary form, the rate of surplus value).

26. If the workday is equal to the level of necessary labor (e.g., that six-hour workday in our example), there is no surplus labor. So, what can the capitalist do in order to achieve his goal of surplus value (profits)? One option is to reduce what he pays the worker. By driving down the real wage (for example, reducing it by one-third), then the hours of labor necessary to produce that wage will fall. Instead of six hours of necessary labor, only four hours would be required now. The result is that two hours of the six-hour workday now would be surplus labor for the capitalist—the basis for production of surplus value.

27. Another option is for the capitalist to use his control over production to increase the work that the laborer performs. Extend the workday, make the workday as long as possible. A ten-hour workday? Fine, that would mean now four hours of necessary labor and six hours of surplus labor. A twelve-hour workday? Better. The worker will perform more work for the capitalist over and above the wage, and capital will grow. Another way of extracting more work from the worker is by intensifying the workday—making workers work harder and faster in a given time period and making sure there is no wasted motion, no slack time. Every moment workers rest is time they are not working for capital.

28. That is the inherent logic of capital. The inherent tendency of capital is to increase the exploitation of workers. In the one case; the real wage is falling; in the other, the workday is increasing. In both cases, surplus labor and the rate of exploitation are driven upward. Marx commented that “the capitalist [is] constantly tending to reduce wages to their physical minimum and extend the working day to its physical maximum.” He continued, however, saying “while the working man constantly presses in the opposite direction.”

Class struggle

29. In other words, within the framework of capitalist relations, while capital pushes to increase the workday both in length and intensity and to drive down wages, workers struggle to reduce the workday and to increase wages. Just as there is struggle from the side of capital, so also is there class struggle from the side of the worker. Why? Take the struggle over the workday, for example. Why do the workers want more time for themselves? Time, Marx noted, is “the room of human development. A man who has no free time to dispose of, whose whole lifetime, apart from the mere physical interruptions by sleep, meals, and so forth, is absorbed by his labor for the capitalist, is less than a beast of burden.”

30. What about the struggle for higher wages? Of course, workers have physical requirements to survive. But they need much more than this. The worker’s social needs, Marx commented at the time, include “the worker’s participation in the higher, even cultural satisfactions, the agitation for his own interests, newspaper subscriptions, attending lectures, educating his children, developing his taste, etc.” All of this relates to what he called “the worker’s own need for development.”

31. But the needs of workers for more time and energy for themselves and to be able to satisfy socially generated needs don’t concern capital as the buyer of labor-power and ruler within production. It’s obvious why—lowering the workday and raising wages mean less surplus labor, less surplus value, and lower profits.

Necessary labor within the household

32. Capital, we have argued, wants the lowest possible necessary labor. But, there is one kind of necessary labor that capital would like to expand—unpaid necessary labor. So far, we have only talked about the necessary labor in the things that workers buy. Marx did not ignore the fact, though, that people need to convert those things they buy in order to consume them; he talked about activities “absolutely necessary to consume things”—like cooking the food purchased. Indeed, Marx pointed out that the greater the “expenditure of labor in the house,” the less money you need to purchase things outside the house.

33. But this labor performed in the household is invisible. Why? Because capital does not have to pay for it. We know, too, that the majority of this work is done by women; and it is work that is generally not recognized or valued. Yet, without this labor within the household (which Article 88 of the Bolivarian Constitution recognizes as “economic activity that creates added value and produces social welfare and wealth”), workers would not be available for capital in the labor market.

34. While capital does not pay for this invisible labor, it benefits. The more work that is done free in the household, the less the wage has to be. The more free time that men have as a result of women’s work in the household, the more capital can intensify the capitalist workday. As the purchaser of labor power, capital is in a position to gain from the unpaid labor of women within the household. And the more intense and lengthy that work in the household, the more capital can gain. And, it works the other way, too: the more capital drives down wages and intensifies the workday for both male and female wage-laborers, the greater the burden placed on the household to maintain workers.

35. How could we deny that the logic of capital is contrary to the need for the development of women?

The logic of capital versus the logic of human development

36. There are many examples of how the logic of capital and the logic of human development are opposed. Think, for example, about nature and the environment. Human beings need a healthy environment and need to live with nature as the condition for the maintenance of life. For capital, though, nature—just like human beings—is a means for making profits. Treating the earth and nature rationally (from the perspective of human beings), Marx noted, is inconsistent with “the entire spirit of capitalist production, which is oriented towards the most immediate monetary profit.” Capitalism thus develops while “simultaneously undermining the original sources of all wealth—the soil and the worker.”

37. The logic of capital, in fact, is the enemy of the logic of human development. Standing opposite capital’s goal is “the worker’s own need for development.” But, if capital and workers are pressing in the opposite direction in capitalism, what determines the outcome?
Unity and separation among workers—unity is the strategy of workers
38. The answer is struggle: what happens to wages and hours of work depends upon the relative strength of the two sides. For workers in capitalism to make gains in terms of their workdays, their wages, and their ability to satisfy their needs, they need to unite against capital; they need to overcome the divisions and competition among workers. When workers are divided, they are weak. When workers compete against each other, they are not struggling against capital; and, the result is the tendency for wages to be driven down to their minimum and the workday to be extended to its maximum. That was and is the point of trade unions—to end divisions and strengthen workers in their struggle within capitalism.

The strategy of capital—divide workers

39. How does capital respond? By doing everything it can to increase the degree of separation among workers. Capitalists may bring in people to compete for work by working for less—e.g., immigrants or impoverished people from the countryside. They may use the state to outlaw or destroy unions or shut down operations and move to parts of the world where people are poor and unions are banned. From the perspective of capital, all this is logical. It’s logical for capital to do everything possible to turn workers against each other, including promoting racism and sexism. Marx described the hostility in the nineteenth century between English and Irish workers in England as the source of their weakness: “It is the secret by which the capitalist class maintains its power. And that class is fully aware of it.”

40. So, while it is logical for workers to want a little security in their lives, to be able to plan their future and raise families without being in a state of constant uncertainty, the logic of capital points in the opposite direction. In fact, the more precarious the existence of a worker, the greater is her dependence upon capital. Capital prefers the worker who is always worried that capital will abandon her, leaving her without a job and with an uncertain future. Capital, wherever possible, prefers the occasional, part-time, precarious worker, the one with no benefits, the one who will accept lower wages and more intense work.

41. The struggle between capitalists and workers, thus, revolves around a struggle over the degree of separation among workers.
Productivity increases

42. Precisely because workers do resist wages being driven to an absolute minimum and the workday to an absolute maximum, capitalists look for other ways for capital to grow; they introduce machinery, which can increase productivity. If productivity rises, then less hours of labor would be necessary for workers to reproduce themselves at that same real wage. By increasing productivity relative to the real wage, they lower necessary labor and increase the rate of exploitation.

43. In the struggle between capital and labor, accordingly, capitalists are driven to revolutionize the production process. That could be good news for everyone: with the incorporation of science and the products of the social brain into production, it means that significant productivity increases are possible. So, there is the obvious potential to eliminate poverty in the world and to make possible a substantially reduced workday (one that can provide time for human development). Yet, remember, those are not the goals of the capitalist. That is not why capital introduces these changes in the mode of production. Rather than a reduced workday, what capital wants is reduced necessary labor; it wants to maximize surplus labor and the rate of exploitation.

44. But, what prevents workers from being the beneficiaries of increased productivity—through rising real wages as the costs of production of commodities fall? How does capital ensure that it and not workers will benefit?

The reserve army of labor

45. If productivity increases dropped from the sky, the falling cost of producing commodities could permit workers to buy more with their existing money wages; in this case, workers could be the principal beneficiaries of productivity gains. But, they don’t drop from the sky; to the extent that productivity increases are the result of changes initiated by capital, the effect is to increase the degree of separation among workers and thus to weaken workers. For example, every worker displaced by the introduction of machinery adds to the reserve army of labor; the unemployed worker competes with the employed worker. Not only does the existence of this reserve army of unemployed workers permit capital to exert discipline within the workplace but it also keeps wages within limits consistent with profitable capitalist production. Displaced workers, for example, may find jobs—but at much lower wages.

46. The same thing is true when capital moves to other countries or regions to escape workers who are organized—it expands the reserve army and ensures that even those workers who do organize and struggle do not succeed in keeping real wages rising as rapidly as productivity. The rate of exploitation, Marx believed, would continue to rise. Even with rising real wages, the “abyss between the life-situation of the worker and that of the capitalist would keep widening.”

Exploitation is not the main problem

47. It is a big mistake, though, to think that the main problem with capitalism is inequitable income distribution—i.e., that the basic reason that capitalism is bad is that workers receive less income than they produce. If this were the only problem, the obvious answer would be to focus upon changing the distribution of income in favor of workers, e.g., strengthen trade unions, regulate capital through state legislation, follow a full employment policy (that reduces the effect of the reserve army)—all such measures of reform would shift the balance of power toward workers.

48. But only for the moment. Because it is essential to understand that capital never sleeps. It never stops trying to undermine any gains that workers have made either through their direct economic actions or through political activity. It never stops trying to divide workers, to turn them against each other, to intensify work, to drive wages down. Even when workers have had the strength to make gains (as in the period after the Second World War), capital looks upon those gains as temporary barriers to go beyond. It uses its essential power to decide how to invest and where to invest in order to regain the offensive (as it did in the so-called Golden Age). That inherent power of capital put an end to the “welfare state” and the “import-substitution” models that were introduced in many countries as a basis for economic development.

49. The problem is not that gains in reducing inequality and exploitation are only temporary. Whether workers’ wages are high or low is not the issue—any more than whether the rations of slaves are high or low. Rather, we need to look at the process of capitalist production itself—to see the nature of the workers that capitalism produces.

How capitalist production deforms workers

50. Think about the situation of workers in capitalism. As we have seen, the goals and authority of capital rule the process of production. Further, workers produce products which are the property of capital. But, workers don’t recognize those products as the result of the activity of working people. On the contrary, machinery, technology, all “the general productive forces of the social brain”, appear to workers as capital and as the contribution of the capitalist. Those products, further, are turned against workers and dominate them—they become the power of capital. What has happened? Simply, Marx explained, because the worker has sold his creative power to the capitalist, that power now “establishes itself as the power of capital, as an alien power confronting him.”

51. The world of wealth, that world created by human activity, faces the worker “as an alien world dominating him.” For workers in capitalism, producing is a process of a “complete emptying-out,” “total alienation,” the “sacrifice of the human end-in-itself to an entirely external end.” And what is the result of this “emptying-out,” this impoverishment in the process of producing? We try to fill the vacuum of our lives with things—we are driven to consume (consumerism). How else can we do this but with money, the real alienated need that capitalism creates?

Other ways that capitalist production deforms people

52. But that drive to “consume, consume!” is only one way that capitalism deforms people. In Capital,Marx described the mutilation, the impoverishment, and the “crippling of body and mind” of the worker “bound hand and foot for life to a single specialized operation” which occurs in the division of labor characteristic of the capitalist process of manufacturing. Did the development of machinery rescue workers under capitalism? No, Marx stressed, it completes the “separation of the intellectual faculties of the production process from manual labor.” “In this situation, head and hand become separate and hostile,” “every atom of freedom, both in bodily and in intellectual activity” is lost.

53. But, why does this happen? Remember that the technology and techniques of production that capital introduces are oriented to only one thing—profits. Since workers have their own goals and struggle for them, the logic of capital points to the selection of techniques that will divide workers from one another and permit easier surveillance and monitoring of their performance. The specific productive forces introduced by capital are not neutral—they do not empower workers and allow them to develop all their capabilities (mental and manual). On the contrary, “all means for the development of production,” as Marx stressed about capitalism, “distort the worker into a fragment of a man, they degrade him” and “alienate from him the intellectual potentialities of the labor process.”

Why producing under capitalism isn’t fun

54. In other words, it’s not an accident that most of us find the workplace a place of misery—the process of capitalist production cripples us as human beings. But, why can’t workers simply struggle against this? Why can’t they turn the capitalist production process into a place consistent with human development?

55. Again, remember the logic of capital: if human development made profits for capital, it would have introduced changes that supported it. But capital isn’t interested in whether the technology chosen permits producers to grow or to find any pleasure and satisfaction in their work. Nor does it care what happens to people who are displaced when new technology and new machines are introduced. If your skills are destroyed, if your job disappears, so be it. Capital gains, you lose. Marx’s comment was that “within the capitalist system all methods for raising the social productivity of labor are put into effect at the cost of the individual worker.” The logic of capital is the enemy of all-round human development.

56. So, if workers do succeed in making gains here (and elsewhere) through their struggles, capital finds ways to respond. And, it has the weapons it needs. Through its ownership of the means of production, its control of production, and its power to decide the nature and direction of investment, capital ultimately can do what it needs to do in order to increase the degree of exploitation of workers and expand the production of surplus value. While it may face opposition from workers, capital drives beyond barriers to its growth in the sphere of production. Capital rules in the sphere of production.

The logic of capitalist circulation

57. So, commodities containing more and more surplus value can be produced. Yet, there is an inherent contradiction in capitalism: capitalists do not want these commodities containing surplus value. Their goal isn’t to consume those commodities. What they want is to sell those commodities and to make real the surplus value latent within them. They want the money.

Capitalists’ need for an expanding market

58. The problem, though, is that the market is not a bottomless pit. In the sphere of circulation, capitalists face a barrier to their growth—the extent of the market. In the same way, then, that the logic of capital drives capitalists to increase surplus value within the sphere of production, it also compels them to increase the size of the market in order to realize that surplus value. If you can’t make the surplus value real by selling the commodities containing surplus value, why produce those commodities? Once you understand the nature of capitalism, you can see why capital is necessarily driven to expand the sphere of circulation.

Globalization of needs

59. Whatever the size of the market, capitalists are always attempting to expand it. Faced with limits in the existing sphere of circulation, capital drives to widen that sphere. How? One way is spatially—by spreading existing needs in a wider circle. “The tendency to create the world market is directly given in the concept of capital itself. Every limit appears as a barrier to be overcome,” Marx commented. Thus, capital strives “to tear down every spatial barrier” to exchange and to “conquer the whole earth for its market.”
60. In this process, the mass media play a central role. The specific characteristics of national cultures and histories mean nothing to capital—through the mass media, capital’s logic tends to conquer the world through the homogenization of standards and needs everywhere. Everywhere the same commercials, the same commodities, the same culture—unique cultures and histories are a barrier to capital in the sphere of circulation.

Creating new needs to consume

61. There’s another way that capital expands the market—by “the production of new needs.” The capitalist, Marx pointed out, does everything he can to convince people to consume more, “to give his wares new charms, to inspire them with new needs by constant chatter, etc.” This is not new—Marx wrote this in the middle of the nineteenth century when capitalist production was still relatively underdeveloped. In the twentieth century, though, the development of the specifically capitalist mode of production made the sales effort essential; but, it wasn’t only the greater productivity that created the problem—capital’s success in driving up the rate of exploitation makes the realization of surplus value a central problem for capital.

62. Thus, the ability of capital to move to low-wage countries to manufacture commodities that are exported back to the more developed world significantly increases the gap between productivity and real wages—i.e., increases the rate of exploitation in the world. And, it means that the sales effort to move commodities through the sphere of circulation must intensify. There’s no greater proof of capital’s victories in the sphere of production than what it is prepared to spend to create new needs in order to sell.

63. Look at the salaries offered to professional athletes. Why are those salaries (and product endorsement fees) so astronomical? It’s all about advertising—i.e., all about realizing surplus value. (The more people who watch sports on TV, the higher the rates that the mass media capitalists can charge the capitalists who are compelled to advertise.) In this respect, there is more than just an obscene contrast between the low wages of women producing, e.g., Nike shoes and the high endorsement fees that Nike pays athletes; there is, indeed, an organic link as the result of the high degree of exploitation.

Exploitation in the sphere of circulation

64. But, exploitation doesn’t only take place in the sphere of production. To turn commodities containing surplus value into money, capitalists must not only stimulate needs; they also require people to work selling those commodities. And, of course, they want to spend as little as possible in their circulation costs; thus, the logic of capital dictates that it should exploit such workers involved in selling these commodities as much as possible. The greater the exploitation of such workers (in other words, the greater the gap between the hours they work and the hours of labor contained in their wage), the lower capital’s costs of selling and the higher the profits after sale.

65. The best way to exploit workers in the sphere of circulation is by using casual, part-time, and precarious workers. Those are workers who are easily separated and divided; they find it difficult to combine against capital, and they thus compete against each other. This competition can become quite intense when there is very high unemployment; not only can capital then drive wages in this sector down—it can also transfer the risk of selling to workers.

Informal workers

66. In other words, a large reserve army of the unemployed makes it possible for capital to use “the informal sector” to complete the circuit of capital. These workers are part of the circuit of capitalist production and circulation (since, for the most part, commodities sold by “buhoneros” are produced within capitalist relations); however, they have none of the benefits and relative security of workers formally employed by capital. They look like independent operators (and even think of themselves this way—a great victory for capital!) but they depend upon the capitalist, and the capitalist depends upon them to sell those commodities containing surplus value. Like unorganized workers everywhere, they compete against each other (and also against workers in the “formal” sphere of circulation). Who gains from this? As usual, capital benefits as the result of the competition among workers.

Why capitalism faces crises

67. Capital, we see, is constantly trying to expand the market in order to realize surplus value. But it doesn’t always succeed. Capital tends to expand the production of surplus value beyond its ability to realize that surplus value. Why? Because of its successes in the sphere of production—in particular, its success in driving up the rate of exploitation. What capital does in the sphere of production comes back to haunt it in the sphere of circulation: by striving “to reduce the relation of this necessary labor to surplus labor to the minimum” (i.e., to increase the rate of exploitation), capital simultaneously creates “barriers to the sphere of exchange, i.e., the possibility of realization—the realization of the value posited in the production process.” Overproduction, Marx commented, arises precisely because the consumption of workers “does not grow correspondingly with the productivity of labor.”

68. Thus, overproduction is “the fundamental contradiction of developed capital.” Capitalist production takes place, Marx pointed out, “without any consideration for the actual limits of the market or the needs backed by the ability to pay”; as a result, there is a “constant tension between the restricted dimensions of consumption on the capitalist basis, and a production that is constantly striving to overcome these immanent barriers.”

Crisis and the sphere of production

69. The first sign of an imbalance between the ability to produce surplus value and the ability to realize it is intensified competition among capitalists. It demonstrates that too much capital is being accumulated (i.e., invested) relative to the limits of the market. Ultimately, though, the effect of this imbalance is crisis—“momentary, violent solutions for the existing contradictions, violent eruptions that re-establish the disturbed balance for the time being.” Commodities don’t sell and, naturally, if commodities cannot be sold, they will not be produced under capitalism because the profits aren’t there. And so, production is reduced and lay-offs are announced—even though the potential to produce is there and people have needs. Capitalism is not, after all, in the business of charity.

The nature of capitalism comes to the surface

70. And, that is exactly what capitalist crisis makes it possible to see about the nature of capitalism: profits—rather than the needs of people as socially developed human beings—determine the nature and extent of production within capitalism. What other economic system could generates the simultaneous existence of unused resources, unemployed people, and people with unmet needs for what could be produced? What other economic system would allow people to starve in one part of the world while elsewhere there is an abundance of food and where the complaint is “too much food is being produced”?

71. But no crisis necessarily leads people to question the system itself. People struggle against specific aspects of capitalism—over the workday, the level of wages and working conditions, the unemployment brought about by a crisis of overaccumulation, capital’s destruction of the environment, and the destruction of national cultures and sovereignty, etc.—but unless they understand the nature of the system, they struggle merely for a nicer capitalism, a capitalism with a human face.

72. Nevertheless, capital doesn’t want a nicer capitalism. It wants profits. And, even though workers may not be trying to end capitalism but are just struggling for fairness within capitalism, their struggles may challenge the drive for profits. In this case, capital may find it necessary to reveal another side of the logic of capital.

Capital’s state—the market and state in capitalism

73. Capital’s motto is: “As much market as possible, as much state as necessary.” In its early days, Marx stressed, capital had great need for the state: “the rising bourgeoisie needs the power of the state.” Why? Because all of the elements capital required for the system to reproduce itself spontaneously were not yet in place. For creating the institutions that would allow capitalism to flourish, capital needed to subordinate all elements of society to itself through the coercive power of the state (e.g., “grotesquely terroristic laws”); it used this power, for example, to compel workers “into accepting the discipline necessary for the system of wage-labor.”

The ‘common sense’ that capital creates

74. With the development of the specifically capitalist mode of production, however, Marx suggested that the need for state intervention on behalf of capital would be lower. The way in which the particular productive forces introduced by capital degrade the worker and “alienate from him the intellectual potentialities of the labor process,” the way that “the advantages of machinery, the use of science, invention, etc.” are necessarily viewed as attributes of capital, and the way in which workers are displaced and divided through the introduction of new technology—all this contributes significantly to make workers feel dependent and powerless in the face of capital.

75. Fully developed, Marx proposed, capitalist production itself sets “the seal on the domination of the capitalist over the worker.” Because capital constantly replenishes the reserve army of labor in the normal course of capitalist production, the market is sufficient to compel workers to accept the rule of capital. Thus, Marx stated that capital itself “breaks down all resistance,” producing “a working class which by education, tradition and habit looks upon the requirements of that mode of production as self-evident natural laws.”

The state as capital’s ultimate weapon

76. Yet, workers do resist, do struggle for their needs. And, the market is not always sufficient by itself to ensure that capital gets the profits which are its goal and source of life. So, capital turns to the state—“as much state as necessary.” It is prepared to destroy trade unions, do away with all pretences of democratic forms, to turn to fascism to get what it wants—the coercive power of the state and “grotesquely terroristic laws” are not a characteristic only of emerging capitalism. Both at its beginning and when fully developed, capital creates the state it needs.

Underlying basis for imperialism

77. And, this is not only true internally. Capital’s drive for profits is the underlying basis for imperialism. In addition to its search for new, cheaper sources of raw materials and new markets in which to sell commodities, capital wants workers who can be exploited. It seeks those who are weak, those who are willing to work for low wages and under poor working conditions, and those who are separated from other workers; thus, capital will move production to secure such advantages. When you understand the logic of capital, you understand that global capitalism is inherent in capital itself—that it drives “to tear down every spatial barrier” to its goal of profits.

78. Here again, to achieve its goal, capital follows the motto of “as much market as possible, as much state as necessary.” As long capital can get what it needs through the market—e.g., as the result of the competition of primary producing countries to sell inputs or the availability of a large pool of workers to exploit in production—it need not draw too heavily upon the coercive power of the imperialist state.

Capital and its state help its market

79. But capital has many weapons before it turns to direct coercion. Where do the dominant ideas about the magic of the market come from? In economics departments, it is not the economists who are critical of the market who get research and financial support from capital and its state. In the battle of ideas, capital draws upon the ideology that interference with the market necessarily leads to disaster and that all attempts to use the state to do good make things worse. Since economists who don’t agree are labeled “bad economists,” they tend to be unemployed or marginalized; thus, the voices everyone hears from economists (and through the media) are the ones that shout “TINA!”—there is no alternative to the market, there is no alternative for poorer countries (indeed, all countries) but to follow the commands of the market.

80. No one could ever accuse capital, though, of relying solely upon the power of ideas. Capital also uses its state to create institutions which ensure that the market will command. International institutions such as the International Monetary Fund, the World Bank, the World Trade Organization, and so-called free trade agreements all have been created to enforce the logic of capital. How? By punishing those who dare to think otherwise, countries that try to develop a policy independent of the dominant capitalist powers.

81. Add to that, imperialism’s “Fifth Column”—the independence and autonomy of Central Banks—and you have the package of institutions that capital uses to foster policies of neoliberalism: policies which remove all restrictions on the movement of capital, remove all laws that protect workers, consumers, and citizens against capital, and reduce the power of the state to check capital (while increasing the power of the state to act on behalf of capital).
Imperialism and the colonial state

82. Despite all this, you can’t stop people from struggling ultimately for their own self-development. In such cases, capital uses the imperialist state to intervene militarily and to support, both by subversion and by financial and military resources, colonial and client states that act to produce conditions for the reproduction of the capitalist world order. And this occurs especially once capital has decided to generate surplus value directly in the periphery—now it must have the assurance that its investments will be protected.

83. With the support of local oligarchies and elites, these colonial states are assigned the function of creating the framework in which the market serves capital best. By separating agricultural producers from the land and providing special economic zones for capital to function freely, these instruments of global capital make available the reserve army of labor that capital wants. Further, they are there to police—to use their coercive power and “grotesquely terroristic laws” to attack challenges to the logic of capital. Whenever these colonial states are unable to carry out this function, though, capital demands as much direct imperialist intervention as necessary.

84. Imperialism, in short, will stop at nothing. Its history of barbarism demonstrates this over and over again. As Che Guevara pointed out, it is a bestiality that knows no limits—one that tries to crush under its boots anyone who fights for freedom.

The essence of imperialism

85. Imperialism is inherent in capital’s goal of surplus value, in its drive “to tear down every spatial barrier” to that goal. Not surprisingly, at various times the competition between capitalists of different countries to expand may lead them to call upon their particular states to give them particular advantages in the exploitation of colonies—thus leading to a competition among imperialist states. However, the fundamental contradiction has always been between capital and the working classes, between the imperialist state and the colonial producers—and, in this, all imperialist states have a common interest.

Capitalism and human development—capitalism’s vicious circle

86. Think about the kind of people that capitalism produces. We have seen that capitalism cripples people in the process of production. Rather than creating the conditions in which people can develop all their potential, capital treats people as means to its goal, profits. Their productive activity is commanded by this external power; they relate to their work, to the products of their work, to the means for their work, to each other, as alien. Capitalist production, we see, is a process that produces impoverished human beings. And those people, producers who have gained little satisfaction from their work, are driven to find satisfaction in the articles of consumption which they are able to command with the wages they have received.

87. What we can observe clearly here is the vicious circle of capitalism. Here we begin with people (a) who are separated from the means of production and with needs which they must fulfill. Those people (b) must go into the labor market to sell their labor power—competing with other people in the same situation. They (c) enter into capitalist production, that process which yields as its result impoverished workers with both the need and the means to consume, within circumscribed limits. Having (d) consumed these alien products, however, they are once again without the means to maintain themselves and must present themselves again to capital; they must once again produce for capital’s goals. This is a vicious circle, and its phases are interdependent—you cannot change one without changing them all.

The vicious circle grows

88. And yet, there is more to this vicious circle of capitalism, because the circle is growing. It grows because of the drive of capital to expand. Precisely because capital generates new surplus value within the production process as the result of exploitation and expands its capacity to produce in order to grow, it must also expand the sphere of circulation of commodities by constantly generating new needs to consume. Because capital must grow, it devotes enormous human and material resources to conjure up new artificial needs. It seduces people into a life of consumerism (which can never be fully satisfied), and it must do this—it must sell more and more commodities. It must create new needs, new needs which increase our dependence upon capital. This is why Marx commented that the “contemporary power of capital rests” upon the creation of new needs for workers.

Limits?

89. Thus, capitalism is a growing circle—a spiral of growing alienated production, growing needs and growing consumption. But how long can that continue? Everyone knows that the high levels of consumption achieved in certain parts of the world cannot be copied in the parts of the world that capital has newly incorporated in the world capitalist economy. Very simply, the earth cannot sustain this—as we can already see with the clear evidence of global warming and the growing shortages which reflect rising demands for particular products in the new capitalist centers. Sooner or later, that circle will reach its limits. Its ultimate limit is given by the limits of nature, the limits of the earth to sustain more and more consumption of commodities, more and more consumption of the earth’s resources.

90. But even before we reach the ultimate limits of the vicious circle of capitalism, there inevitably will arise the question of who is entitled to command those increasingly limited resources. To whom will go the oil, the metals, the water—all those requirements of modern life? Will it be the currently rich countries of capitalism, those that have been able to develop because others have not? In other words, will they be able to maintain the vast advantages they have in terms of consumption of things and resources—and to use their power to grab the resources located in other countries? Will newly emerging capitalist countries (and, indeed, those not emerging at all) be able to capture a “fair share”? Will the impoverished producers of the world—producers well aware of the standards of consumption elsewhere as the result of the mass media—accept that they are not entitled to the fruits of civilization? Does anyone really think this question is going to be left to the market? Indeed, this is precisely the case where capital will use “as much state as necessary.”

The specter of barbarism

91. The specter of barbarism is haunting the world. How could anyone ever think that capitalism is a path to human development? Yes, of course, some people have always been able to develop much of their potential within capitalism—but all people cannot. Why? Because the very nature of capitalism depends upon the ability of some people to monopolize the fruits of human activity and civilization and to exploit and exclude others. Capitalism has never been a society in which the free development of each is the condition for the free development of all; however, the implications of its inherent injustice and inequality are obvious now that the limits to its particular pattern of expansion have become apparent.

Socialism and human development

92. There is an alternative—an alternative which flows from the logic of human development. Consciously or unconsciously, people have fought long for that alternative; they have opposed the logic of capital with the logic of human development. In every struggle for human dignity and social justice—in every struggle for better wages and working conditions, against racism and patriarchy, for protecting our living environment, and for our rights to adequate health, education, and housing (among our other needs), the concept of human development is implicit. These are struggles to remove the barriers to our full and complete development.

93. Implicit, too, in our collective struggles is the concept that we are all connected—that we need each other, that indeed the free development of each is the condition for the free development of all. The alternative is a society based upon love and solidarity, upon our unity as a human family, “the unity of man with man, which is based on the real differences between men” (Marx).

94. That society, of course, can’t be one in which the state decides, where there is the continuation of the division between thinking and doing, where we are dominated (in the workplace, the community, or the household), and where there is inequality in our ability to develop our potential. After all, what kind of people are produced in such a society? As the Bolivarian Constitution recognizes, the human development alternative can only be a democratic, participatory, and protagonistic society—one in which our participation, our practice, is the necessary condition of ensuring our “complete development, both individual and collective.”

Creating rich human beings

95. The logic of human development points to our need to be able to develop through our democratic, participatory, and protagonistic activity in every aspect of our lives. Through revolutionary practice in our communities, our workplaces, and in all our social institutions we can produce ourselves as what Marx called “rich human beings”—rich in capacities and needs—in contrast to the impoverished and crippled human beings that capitalism produces. Understanding the logic of human development demonstrates the perverse, anti-human logic of capital and points to the alternative we need to build.

96. In contrast to the hierarchical capitalist state (which Marx understood as an “engine of class despotism”) and to the despotism of the capitalist workplace, only a revolutionary democracy can create the conditions in which we can invent ourselves daily as rich human beings. This concept is one of democracy in practice, democracy as practice, and democracy as protagonism. Democracy in this sense—protagonistic democracy in the workplace and protagonistic democracy in neighborhoods, communities, and communes—is the democracy of people who are transforming themselves into revolutionary subjects.

The elementary triangle of socialism

97. Not only is this revolutionary democracy necessary to identify the needs and capacities of communities and workers but it is also the way to build the capacities of the protagonists and to foster a new social relation among producers, the relation of associated producers based upon solidarity. How else but through protagonistic democracy in production can we ensure that the process of producing is one that enriches people and expands their capacities rather than crippling and impoverishing them? How else but through protagonistic democracy in society can we ensure that what is produced is what is needed to foster the realization of our potential?

98. If there is to be democratic production for the needs of society, however, there is an essential precondition: there cannot be a monopolization of the products of human labor by individuals, groups, or the state. In other words, the precondition is social ownership of the means of production, the first side of what President Hugo Chávez has called the “elementary triangle” of socialism: (a) social ownership of the means of production, which is a basis for (b) social production organized by workers in order to (c) satisfy communal needs and communal purposes.

99. Let us consider each element in this particular combination of distribution-production-consumption.

A. Social ownership of the means of production

100. Social ownership of the means of production is critical because it is the only way to ensure that our communal, social productivity is directed to the free development of all rather than used to satisfy the private goals of capitalists, groups of individuals, or state bureaucrats. Social ownership is not, however, the same as state ownership. State property can be the basis for state capitalist enterprises, hierarchical statist firms, or firms in which particular groups of workers (rather than society as a whole) capture the major benefits of this state property. Social ownership, however, implies a profound democracy—one in which people function as subjects, both as producers and as members of society, in determining the use of the results of our social labor.

B. Social production organized by workers

101. Social production organized by workers builds new relations among producers—relations of cooperation and solidarity. In contrast to capitalist production, it allows workers to end “the crippling of body and mind” and the loss of “every atom of freedom, both in bodily and in intellectual activity” that comes from the separation of head and hand. As long as workers are prevented from developing their capacities by combining thinking and doing in the workplace, they remain alienated and fragmented human beings whose enjoyment consists in possessing and consuming things. And, if workers don’t make decisions in the workplace and develop their capacities, we can be certain that someone else will. Protagonistic democracy in the workplace is an essential condition for the full development of the producers.

C. Satisfaction of communal needs and purposes

102. Satisfaction of communal needs and purposes focuses upon the importance of basing our productive activity upon the recognition of our common humanity and our needs as members of the human family. Thus, it stresses the importance of going beyond self-interest to think of our community and society. As long we produce only for our private gain, how do we look at other people? As competitors or as customers—i.e., as enemies or as means to our own ends; thus, we remain alienated, fragmented, and crippled. Rather than relating to others through an exchange relation (and, thus, trying to get the best deal possible for ourselves), this third element of the elementary triangle of socialism has as its goal the building of a relation to others characterized by our unity based upon recognition of difference. As in the case of programs of ALBA (the Bolivarian Alternative for the Americas), we build solidarity among people and at the same time produce ourselves differently.

103. And, this concept of solidarity is central because it is saying that all human beings, all parts of the collective worker, are entitled to draw upon our “communal, social productivity.” The premise is not at all that we have the individual right to consume things without limit but, rather, that we recognize the centrality of “the worker’s own need for development.” Further, our claim upon the accumulated fruits of social brain and hand is not based upon exploitation. It is not because you have been exploited that you are entitled to share in the fruits of social labor. Rather, it is because you are a human being in a human society—and because, like all of us, you have the right to the opportunity to develop all your potential.

104. At the same time, as a human being in a human society, you also have the obligation to other members of this human family—to make certain that they also have this opportunity, that they too can develop their potential. As a member of this family you are called upon to do your share—a point present in the Bolivarian Constitution: Article 135 notes “the obligations which by virtue of solidarity, social responsibility and humanitarian assistance, are incumbent upon individuals according to their abilities.”

The defects we inherit

105. Of course, completing the socialist triangle is not something that can occur overnight. The implications of this are significant. For example, producing for communal needs and purposes requires a democratic mechanism for transmitting needs from below in order to engage in conscious coordination and planning. However, the communal needs and purposes initially identified will be the needs of people formed within capitalism—people who are “in every respect, economically, morally and intellectually, still stamped with the birth marks of the old society.” Similarly, how can production be oriented toward society when self-interest of the producers still prevails? And how, under these conditions, can we ensure that property is truly social? Without production for social needs, there can be no real social property; without social property, no worker decision-making oriented toward society’s needs; without worker decision-making, no transformation of people and their needs. The failure to complete that triangle means that the defects inherited from the old society infect everything. So, how can you create socialism for the twenty-first century when everything depends upon everything else?

Revolutionary practice

106. The problem, in short, is how to create new socialist men and women at the same time as new material conditions are developed. It can only occur through a process—one in which people transform themselves through their practice. We always need to remember the concept of revolutionary practice—“the simultaneous changing of circumstance and human activity or self-change.” That process by which people prepare themselves for a new society, we see, can only be one of real democracy, protagonistic democracy, democracy as practice.

107. Democratic decision-making within the workplace (instead of capitalist direction and supervision), democratic direction by the community of the goals of activity (in place of direction by capitalists), production for the purpose of satisfying needs (rather than for the purpose of exchange), common ownership of the means of production (rather than private or group ownership), a democratic, participatory, and protagonistic form of governance (rather than a state over and above society), solidarity based upon recognition of our common humanity (rather than self-orientation), the focus upon development of human potential (rather than upon the production of things)—all these are means of producing new human beings, the limbs of a new organic system, socialism for the twenty-first century.
The virtuous circle of socialism

108. What kind of people do we create as we build this new socialism? They are quite different from those produced within capitalism. In contrast to the “vicious circle of capitalism,” socialism contains a “virtuous circle.” We begin with (a) producers who live within a society characterized by solidarity—people who recognize their unity based upon differences. These producers (b) enter into an association in order to produce for the needs of society and (c) in this process develop and expand their capacities as rich human beings. Thus the product of their activity is (d) producers who recognize their unity and their need for each other. They, accordingly, reenter into this process of the virtuous circle of socialism.

109. Like the vicious circle of capitalism, this, too, is an expanding circle. However, its growth is not driven by the logic of capital—a logic which demands greater production, greater consumption of the earth’s resources, and greater consumption. On the contrary, the growth driven by the logic of human development is not a quantitative growth but rather a qualitative growth—the development of all-sided, rich social individuals. There are no inherent limits here—except the full development of all human potential.

The path to human development

110. In contrast to that socialist triangle (social property, social production, and social needs), think about the capitalist triangle—(a) private ownership of the means of production and (b) exploitation of workers for (c) the drive for profits. Does anyone seriously think that this can be the path to human development?

111. The only path is socialism. But, knowing where we want to go and the path to take us there is only the beginning.

112. We know that capitalism and imperialism will do everything they can to divert us, to divide us, to convince us that there is no alternative.

113. We know we have to be prepared to fight.

114. If we believe in people, if we believe that the goal of a human society must be that of “ensuring overall human development,” our choice is clear:

115. Socialism or barbarism.

See Also: A Failure of Capitalism (VI): Fear, Uncertainty, and the Economy, “Anatomy of Thatcherism”, Social Welfare, Socialism and Healthcare, Why collectivism “works,” but doesn’t work, Why Collectivism “works”, but doesn’t work, Do current incentive structures make sense?, and Economic Power.

[tags]socialism, capitalism, barbarism, monthly review, Michael A. Lebowitz, Venezuela, revolutions, future of human development, economy, means of production, equality, justice[/tags]

Cars & Cities

The Article: Cars and Cities by Paul M. Sweezy, appearing in the April 1973 iteration of Monthly Review. A lengthy but worthwhile review of the rise of the car and modern infrastructure in relation to contemporary modes of production. Key quote:

I do not think that fundamental changes in the structure of cities and their relation to society as a whole can be effected without a radical change in the social order. In what I have called the traditional commuter situation, it should certainly be possible to bring about a great improvement in public transport both into and out of the inner city and also within the inner city. This, perhaps together with certain restrictions on the use of cars in the inner city, might do much to relieve congestion, particularly of the rush-hour variety. But it would leave untouched other kinds of movement within the metropolis which are much less susceptible to facilitation through improvement of public transport.23 And it would do nothing to check, let alone reverse, the sprawl process.

To accomplish these ends, and at the same time to eliminate congestion and pollution and in other ways make the city a better place to live, it seems to me an absolutely necessary (though far from sufficient) condition that the causal link between the location of economic activity and profit anticipations has to be decisively broken. Only if a rational job pattern is planned and assured for years ahead will it be possible to develop new residential communities with appropriate population densities and efficient public transportation systems both within and between them. And this requires not only public ownership of land but also socialization of the entire investment process so that production can be guided not by profit but for the satisfaction of the people’s needs.

The Full Text:

“Cities, after all, have a great deal in common with cars. More and more, in fact, they often seem to be turning into cars. There are deep mysteries here, impenetrable to the present shallow state of human understanding. Somehow, we know not how, things communicate.”

—Russell Baker, New York Times, March 8, 1973

In Marxist theory the treatment of technology has generally referred to production, the means of production, the character of the labor process, and related matters. This follows the example set by Marx himself in his justly famous chapter on machinery and modern industry in Volume 1 of Capital which occurs in the part devoted to the production of relative surplus value. Neither there nor anywhere else in Capitalis there any discussion or analysis of the impact of technology on consumption and via consumption on processes of capital accumulation and social development.

The reason for this is not that Marx excluded consumption from a role in the capitalist process. On the contrary, in the well-known Introduction to the Critique of Political Economy,” Marx wrote:

Definite production thus determines definite consumption, distribution, exchange and definite relations among these different elements. Tobe sure production, in its one-sided form, is in its turn also determined by the other elements. For example, if the market, i.e., the sphere of exchange, expands, production grows and becomes further subdivided.1

It is evident from this and other passages in the Introduction that Marx regarded production and consumption as dialectically interrelated aspects of a single complex process. As in all such cases, change initiated in any part can in principle—though it does not necessarily have to—ramify throughout the whole, setting in motion either self-limiting or cumulative sequences of change. Marx provided a classic description and analysis of a cumulative sequence of change within the production process in a beautiful passage which begins: “A radical change in the mode of production in one sphere of industry involves a similar change in other spheres.”2

The fact that Marx failed to analyze any such sequences involving both production and consumption did not arise from any denial that they might exist, or even that they actually did exist. In discussing the consequences of machinery, he wrote:

The immediate result of machinery is to augment surplus value and the mass of products in which surplus value is embodied. And, as the substances consumed by the capitalists and their dependents become more plentiful, so too do these orders of society. Their growing wealth, and the relatively diminished number of workmen required to produce the necessaries of life beget, simultaneously with the rise of new and luxurious wants, the means of satisfying those wants. A larger proportion of the produce of society is changed into surplus produce, and a larger part of the surplus produce is supplied for consumption in a multiplicity of refined shapes. In other words, the production of luxuries increases.3

Here was a clear example of an interaction of production and consumption resulting from technological change, one which from some points of view was certainly far from insignificant. The reason why Marx noted it only in passing and made no attempt to analyze it in depth, as he did with the consequences of machinery in the production process itself, was probably because he saw it as affecting only the consumption patterns of the capitalists and their dependents. As far as the working class was concerned, he believed that the capitalistic use of machinery had had disastrous consequences, ruining handicraftsmen and lowering the wages of factory hands by simplifying their work and opening the way for the mass employment of women and children. By comparison, the stimulation of luxury consumption by the capitalist class was a matter of secondary importance which not only could but should be abstracted from in studying the modus operandi of the capitalist system.

In the century since the publication of the first volume of Capital, however, it is clear that technological changes affecting both production and consumption and involving fundamental alterations in the consumption patterns of the mass of workers, with far-reaching consequences for the functioning of capitalism, have occurred in the advanced imperialist metropolises of the global capitalist system.4 What is at issue here is what may be called the political economy of the motor car which, so far as I am aware, has never been subjected to serious analysis in the Marxian literature.

In the beginning the automobile was of course a mere curiosity, but developed rapidly into a luxury good entering into the consumption of the upper class. “As long as motor cars were few in number,” Lewis Mumford wrote, “he who had one was a king; he could go where he pleased and halt where he pleased; and this machine itself appeared as a compensatory device for enlarging an ego which had been shrunken by our very success in mechanization.”5 This was clearly the situation which obtained before the First World War: in 1910 there were some 19,000 people for every car in the United States.6 During the next decade, however, the automobile began to enter into popular consumption, the ratio of people to cars dropping precipitously to approximately 11 to 1 by 1920. On the side of technology and production, the decisive factor here was Henry Ford’s introduction of the low-priced Model T, involving (as both cause and effect) such cost-reducing technologies as the assembly line and interchangeable parts.

Since 1920 the people/car ratio has further declined as follows: 1930—4.5; 1940—4.1; 1950—3.1; 1960—2.4; 1970—1.9. At the present time, in other words, there are more than half as many cars as people in the United States. The automobile has become a mass-consumption commodity in the fullest sense of the term. And in the process it has profoundly altered many aspects of social existence for all classes and strata of society.

The most obvious manifestations of this process—which the late Paul Baran and I have called the “automobilization” of society7—are traffic congestion and pollution, and these are also the effects which have been most instrumental in focusing public attention on the social and environmental implications of automobilization. But congestion and pollution are essentially superficial phenomena, comparable to the outward symptoms of a disease with deep roots in the organs of the body. If we are ever to deal with the disease itself we must go beyond the symptoms and study its etiology. In the present instance what we need first of all is to understand the ways in which the automobile in the process of becoming a mass-consumption good impinged upon and ultimately transformed the geography and demography of the country.

Before the automobile age there was a sharp physical division between city and country. The city was a clearly bounded built-up area beyond which there was country (or in some directions a body of water). People who worked in the city but lived outside of it had to rely on transportation by rail for getting in and out. With the railroads limited to providing station-to-station service and readily accessible only from relatively short distances on both sides of the tracks, the areas available for suburban settlement were quite restricted. They were for the most part inhabited by upper-income people and those who catered to their needs, providing for a quantitatively small sector of the bourgeoisie many of the advantages of country living in close proximity to the urban centers.8

The coming of the automobile as such did not change this situation. In the early years cars were expensive and unreliable so that only the well-to-do could afford them and their upkeep. In addition, except for city and town streets, roads were few and bad. Under these circumstances as far as the suburbs were concerned, cars complemented the existing patterns rather than changing them. Owned by the upper-income commuters and largely chauffeur-driven (the chauffeur fulfilling the role of mechanic as well as driver at a time when repair and service stations were all but nonexistent), cars expanded the area within which commuters could conveniently live but introduced no new elements into the picture. The 1920s saw the beginning of an extremely complex cumulative process, culminating in what it has become usual to refer to as today’s “urban crisis.” The immediately propelling forces underlying this process were, first, the cheapening of the automobile; and second, the extension of the road and highway network.

On the production side, the development of the automobile and the automobile industry provides a classic illustration of the laws of capitalist accumulation. Originally consisting of hundreds of small shops, mostly formerly carriage-makers, using essentially handicraft methods, the industry was rapidly mechanized and concentrated in a few large firms. In the process new technologies were pioneered; and new forms and strategies of organization and management were devised. The Ford Motor Company, under the sole control of the first Henry Ford, was the perfect example of what Marx called concentration of capital, expanding entirely through investing its own profits. General Motors, on the other hand, also illustrates the centralization of capital in Marx’s sense, i.e., the combination of a number of separate enterprises into one, a pattern likewise followed by Chrysler and American Motors, the other two still surviving U.S. firms in the industry. During the fiercely competitive stage of the industry’s development, up to the early 1920s, prices declined in step with costs. As an example, when the Model T Ford was introduced in 1908 its price was $1,000; by 1924 it had fallen to less than $300, i.e., by more than 70 percent.9 During the same period per capita national income in current prices more than doubled (from an average of about $300 in 1908 to $660 in 1924).10 Obviously the result of these changes was to open up a vast new market for automobiles during this crucial decade and a half: the total number of passenger vehicles registered in 1910 was about a half million and this had increased fortyfold to 20 million by 1925.11

All these cars would have had no place to go, however, had it not been for a vast increase in the road network. As a very rough indicator of what was happening here, the mileage of surfaced roads increased by 81 percent between 1910 and 1920, by 88 percent between 1920 and 1930, and by 97 percent between 1930 and 1940.12 At the same time of course the quality and carrying capacity of the roads were greatly improved. In recent years, indeed, it has been mainly through the upgrading of roads or the construction of multilane freeways paralleling or replacing existing routes that the capacity of the highway network has been expanded.

It should not be supposed that all this has taken place in a smooth and continuous process. The dominant dynamic force has of course been the mass production and sale of new cars, rising from around two million in 1920 to eight million or more in the last few years (excluding truck, buses, and imports). But since cars last up to ten years or more, the number on the road, distributed in large part through the used-car market, cumulatively increased to nearly 90 million by 1970; and it is the total number of vehicles rather than new sales which generates pressure on the highways. This pressure has made itself felt unevenly and has been responded to by various governmental units at the local, state, and federal levels even more unevenly. At some times and places traffic has built up far beyond the capacity of the available roads, creating bottlenecks and intensifying pressures on the authorities; and at other times and places building has outstripped the growth of traffic, only to be overtaken in turn by the inexorable build-up of more cars and more traffic.

The foregoing account of the interaction between cars and roads is descriptive in nature and fails to convey a sense of the enormous power of the economic forces which have driven the process forward, especially in the last 25 years since the recovery of the automobile industry from the almost complete shutdown forced upon it during the Second World War. The private interests which cluster around and are directly or indirectly dependent upon the automobile for their prosperity are quantitatively far more numerous and wealthy than those similarly related to any other commodity or complex of commodities in the U.S. economy. Here is a quick run-down.

(1) The automobile industry itself. The first, third, and seventh corporations on Fortune’s list of the 500 largest are automobile producers, and the industry as a whole is easily the most profitable in the economy.13

(2) Manufacturing industries largely dependent on the automobile. Three more of the largest ten on the Fortune list (nos. 2, 6, and 8) are oil companies. And by one researcher’s count, altogether 22 of the 50 largest (including the auto and oil companies already listed) “are in automobiles and highways for the bulk of their income.”14

(3) Service industries largely dependent on the automobile. Here we include dealers, wholesalers of vehicles and parts, gasoline stations, and all sorts of garage and repair facilities. In 1967 there were about a half million establishments under these headings employing over two million employees. If we assume that in most cases the proprietors also work, we would conclude that something over 3 percent of the total labor force is employed in directly servicing automobiles. And this does not count the numerous categories of employment, such as motels and resorts, which are almost as dependent, albeit indirectly.

(4) Users of highways for profit. After a rapid process of centralization, there were 1,250 intercity trucking companies in 1968, employing nearly a half million workers and carrying around 20 percent of the country’s long-distance freight. At the same time the Teamsters Union, which is the largest union in the country with a membership of more than 1,700,000, is centered in the fields of trucking and warehousing. In addition of course most big corporations have their own fleets of trucks. And there are other types of commercial highway users such as buses (urban and intercity) and taxicabs.

(5) Makers of highways, including an important segment of the construction industry (about 11 percent of the total measured by value added in 1968) and a large number (about 600,000 in 1969) of government workers (federal, state, and local) employed in the planning, supervising, maintaining, and repairing of highways.

(6) Last but not least is the automobile-driving public (in 1968 there were 101 million registered motor vehicles of all kinds and 105 million licensed drivers). Though the increasingly severe problems of congestion and pollution are now causing many of the country’s motorists to have second thoughts, it is nevertheless true that through the whole period of automobilization from 1910 right up through the 1960s, they felt more or less continuously restrained and frustrated by an inadequate road and highway network. They therefore provided massive and enthusiastic political support for road-building, culminating in the launching in 1956 by the federal government of the multibillion-dollar Interstate Highway System, backed by a device called the Highway Trust Fund which ensured that all federal taxes collected on motor vehicles, gasoline, and related equipment would be used to construct a vast system of superhighways.15

This bare listing of the main components of what may be called the automobile-industrial complex could, and in any thorough study should, be complemented by an analysis of its structure and modus operandi. Here it must suffice to note that these various interests are represented by a large number of trade associations and other organizations which are amply financed and staffed and are active on a full-time basis at all levels of government as well as in the realm of propaganda and opinion formation. As Jerome puts it, “The scurry work, the wheedling and coercion, the swapping of favors and collection of political debts, is done by a large and complexly interwoven network of associations and pressure groups.”16 As would be expected, in other words, the enormous economic wealth and power of the automobile-industrial complex have been effectively mobilized and brought to bear at the political and ideological levels.

Let us now turn to the impact of automobilization on the development of cities and the living patterns of their inhabitants. Decisive in this connection has been the obliteration of the old sharp dividing line between city and country. Drive from the center of an American city today in any direction, and you will of course eventually come to open country. But you will never cross a boundary clearly demarcating the one from the other. What you will observe instead is a gradual thinning out of the density of settlement. The old distinctive commuter suburb dependent on rail transport has been swallowed up and incorporated into an expanded urban area.17 And in some places, particularly in the northeast between Boston and Washington, expanding urban areas or metropolises have run into each other.18 In such cases your trip from one city center will take you through roughly concentric rings of decreasing density into another set of concentric rings of increasing density.

This obliteration of the old distinctions between city, country, and suburb—often called “urban sprawl”—would have been impossible but for the automobile which, with its complementary road and highway network, has introduced what may be called a generalized factor of mobility replacing the former limited and specific modes of mobility. The car can go in any direction for any distance. The horse-drawn vehicle, on the other hand, is necessarily short-haul, and both railroads and trolleys are track-bound and therefore restricted to certain prescribed routes. These specific modes of mobility impose a definite shape on both economy and society, much as a skeleton may be said to impose a shape on a living body. With the coming of the generalized factor of mobility, these constraints are removed and radically new locational patterns become possible.

They become possible, but no particular new pattern is dictated or enforced. What actually happens is therefore determined by other considerations. And here we must, I think, give primacy to the overall process of capital accumulation which both seeks out and responds to profitable investment opportunities on the one hand, and creates new ones on the other. The point is that with greater freedom of mobility, the shape of economy and society could adjust to the pushes and pulls of the accumulation process more rapidly and completely than would otherwise have been the case. And the likelihood of cumulative rather than self-limiting processes of change was greatly increased. Moreover, the possibility existed and was soon translated into reality that cumulative change, once initiated, would take on a life of its own, often contradicting rather than serving the economic and social needs which had given rise to it in the first place.

Automobilization started somewhat later, but in the main coincided with the transition from competitive to monopoly capitalism. The emerging corporate giants, including those directly or indirectly dependent on the automobile, were more profitable than their predecessors and were therefore able to grow more rapidly than the smaller and more competitive sectors of the economy (Marx’s concentration of capital); and their huge financial resources gave them the leverage to engineer an uninterrupted series of mergers (Marx’s centralization of capital). Technologically, this increasingly dominant monopolistic sector of the economy was (and is) highly dynamic, manifesting a strong bias toward more and more sophisticated, capital-intensive methods of production. Moreover, the big monopolies, in their search for new markets, have made available to other sectors of the economy advanced mechanical, electronic, chemical and other sophisticated technologies which in turn have revolutionized these sectors’ methods of production. What is particularly relevant from our present point of view is that in this way U.S. agriculture, in spite of the fact that it does not readily lend itself to monopolization, has been rapidly mechanized and chemicalized, leading to the relative depopulation of the countryside and the crowding of displaced farmers, sharecroppers, and agricultural laborers into the cities. As a result of this internal migration as well as of natural population growth, the cities have experienced very rapid expansion during the automobilization period. (In the half century from 1910 to 1960, the urban population increased from 42 million to 125 million, approximately 300 percent; while the rural population increased 50 to 54 million, or only 8 percent.)

Urban growth on this scale would have involved a comparable increase in the geographical size of cities even if the new residential areas had been of the built-up, high-density variety. But given the general mobility factor introduced by the automobile, the urban-sprawl pattern, involving a much more than proportional increase in area, became both a possibility and a reality. Where in earlier times the children of slum-dwelling immigrants had, as they climbed the economic ladder, moved into compact neighborhoods within the built-up city, now the tendency was increasingly to move to the fringes and the formerly railroad-dependent suburbs. The slums in turn were filled up no longer by immigrants from abroad (the First World War effectively put an end to this kind of immigration) but by those expelled from U.S. agriculture, including disproportionately large numbers of blacks, Mexican-Americans, and Puerto Ricans.

And now comes the final act in what may be called the drama of the car and the city. The massive outflow of population from the old inner city brings with it much more than a mere change in residential patterns. As people move out, all sorts of economic activities move with them, and a process of obsolescence and decay is initiated in the center. First to follow the population movement of course are retail and service establishments. But these are soon joined by manufacturers and wholesalers who on the one hand now find a labor supply and cheaper land on the outskirts and on the other hand are repelled by the deterioration in the center. The movement of residences comes first, but the movement of jobs soon reinforces the movement of residences, which in turn stimulates further movement of jobs, and so on in a self-reproducing cumulative process.

It might be supposed that this would result in a more or less even and continuous settlement of the space occupied by the outward movement, with densities declining in direct proportion to distance from the center, so that there would after all be a reasonably clear demarcation between built-up area and open space beyond. But this is not the way it happens in a regime of private property in land such as that which obtains in the United States. Typically, large amounts of land are held off the market and out of use by investors (or, if you prefer, speculators), as a result of which the development process often has to leapfrog over areas of open land.19 And in addition densities are kept down by zoning ordinances prescribing minimum sizes for residential lots in parts of the metropolis, usually farther out, controlled by upper- and middle-income whites determined to exclude the poor and the black from their neighborhoods. The consequence is that the city comes to sprawl over an area much greater than mobility and economic factors alone would dictate. By now, according to Hans Blumenfeld, “the overall density of American urban areas is about one fifth to one sixth of the density prevailing a century ago, when walking was the predominant mode of transportation.”20

This means that an enormous amount of transportation of goods and people has to take place day in and day out just to keep the life of the city going. Much of this is commuting in the traditional sense of the term, i.e., movement of people living in the outskirts to and from work in the city center (this obviously creates all sorts of special problems because it is concentrated in a few hours in the morning and evening). But much more in the aggregate is of a different character: goods being supplied to economic units scattered all over the urban area; children going to and from school; shoppers getting to retail outlets and back home again; people getting together for social purposes; and a new and increasingly important kind of commuting, i.e., the going to and from jobs by workers who both live and work in the outskirts, which may involve relatively short trips in the same section but also may involve long trips from a section on one side of the city across the center to another section on the other side (with all possible variations in between). Except in the case of traditional commuting, which lends itself very well to the use of public transportation, almost all of this movement now takes place by private automobile. An impressionistic notion of how vast the volume of travel by private automobile has become can perhaps be derived from the following two items culled from recent issues of the New York Times: (1) According to a Gallup Poll, 81 percent of all American workers travel to and from work by automobile. (May 30, 1971); (2) The Associated Press reports that “American housewives average about 100 miles each week just in family chauffeuring and errands around town.” (January 23, 1973). With the number of cars, the urban population, and the area of sprawl all steadily expanding, it is no wonder that pollution and congestion are coming to be experienced as the manifestations of an acute urban crisis;21 or that the general factor of mobility which the automobile was in its golden age is increasingly turning into its opposite.

One final point needs to be made in this highly sketchy survey of the interrelation and interaction between the car and the city. When we speak of traditional commuting (outskirts to city center and back), we are talking primarily about a small number of cities which are both big and also old in the sense that they had railroad-dependent suburbs in the pre-automobile age—chief among them New York, Chicago, Philadelphia, Boston, and San Francisco. In addition, these are cities with highly developed business centers not directly related to production, embracing national or regional corporate headquarters, banking and insurance, shipping offices, and so on. While there has been considerable outward movement of such functions, on the whole the advantages of keeping them together, in a compact area within which rapid face-to-face communication is easily maintained, are so great that these central business areas have grown with the overall growth of the metropolis. As a consequence, too, other economic and cultural activities which are encompassed in the concept of “downtown”—hotels and restaurants, theaters and concert halls, museums, elegant department stores and specialty shops—have survived and even flourished.

Where these conditions are found, the city retains much of its traditional structure and character, despite the ubiquitous sprawl and the decaying slums and ghettos between downtown and the outer residential areas. But where these conditions are not found or are found in a relatively undeveloped form—and this is the case with most cities which have experienced most of their growth during the automobile age—there has been a strong tendency for the old urban structure to break down and a new one without historic precedent to take its place. The process of sprawl has brought with it a decentralization of most of the functions usually associated with downtown, with resultant emergence of a multiplicity of subcenters, each offering some of the services of downtown—shopping areas, branch banks, motels, restaurants, cinemas—but without any of its character or magnetism. When this stage has been reached, the city as a meaningfully organized and structured form of civilized living has disappeared in favor of an amorphous aggregate of people, dwellings, cars, roads, and economic units jumbled together in a more or less continuous and potentially ever-expanding geographical area. Los Angeles is the obvious prototype of this kind of urban area. It was vividly characterized as long ago as 1959, in a perceptive series of articles by Harrison Salisbury in the New York Times, as follows:

Here, nestled under its blanket of smog, girdled by bands of freeways, its core eviscerated by concrete strips and asphalt fields, its circulatory arteries pumping away without focus, lies the prototype of Gasopolis, the rubber-wheeled living region of the future.

Los Angeles is no longer a city as the term has been conventionally defined: Sam S. Taylor, general manager of Los Angeles traffic, calls Los Angeles a “mobile region.”

For anyone looking toward the future, toward the end result of the full autofication of the American metropolis, Los Angeles is the phenomenon to analyze most carefully.

When Lincoln Steffens went to the Soviet Union just after the Bolshevik Revolution, he proclaimed, “I have seen the future—and it works.”

Today’s visitor to Los Angeles might paraphrase Steffens and say, “I have seen the future—and it doesn’t work.” (March 3, 1959)

Since that was written a great deal has happened, and it seems less likely today than it did then that the future lies with Gasopolis. The recently created federal Environmental Protection Agency has even proposed that, in order to cope with the smog problem, automobile traffic in Los Angeles should be cut by 80 percent through gasoline rationing. This was, to be sure, more for its shock effect than because the EPA or anyone else expects it to be taken seriously (one estimate is that an 80 percent reduction in auto traffic in Los Angeles would mean the loss of 400,000 jobs). Still, this, like the already noted change in the public attitude toward the Interstate Highway System, is one of many indications that urban development in the United States is entering a new period in which increasingly serious efforts will be made to transform the automobile from the master to the servant of people.

Any attempt to elaborate on this theme would take us far beyond the confines of an essay aimed at elucidating the role of the automobile in the genesis of the present urban condition.22 I will only say in conclusion that while I believe certain palliatives to be possible, at least in principle, within the framework of the present monopoly capitalist system, I do not think that fundamental changes in the structure of cities and their relation to society as a whole can be effected without a radical change in the social order. In what I have called the traditional commuter situation, it should certainly be possible to bring about a great improvement in public transport both into and out of the inner city and also within the inner city. This, perhaps together with certain restrictions on the use of cars in the inner city, might do much to relieve congestion, particularly of the rush-hour variety. But it would leave untouched other kinds of movement within the metropolis which are much less susceptible to facilitation through improvement of public transport.23 And it would do nothing to check, let alone reverse, the sprawl process.

To accomplish these ends, and at the same time to eliminate congestion and pollution and in other ways make the city a better place to live, it seems to me an absolutely necessary (though far from sufficient) condition that the causal link between the location of economic activity and profit anticipations has to be decisively broken. Only if a rational job pattern is planned and assured for years ahead will it be possible to develop new residential communities with appropriate population densities and efficient public transportation systems both within and between them. And this requires not only public ownership of land but also socialization of the entire investment process so that production can be guided not by profit but for the satisfaction of the people’s needs.

NOTES

1. The Introduction in question was first published by Kautsky in 1903 and is not to be confused with the Preface to the 1859 work The Critique of Political Economy. It is actually the Introduction to the Grundrisse der Kritik der Politischen Okonomie (Rohentwurf), which was not published in full until 1939. The quotation is from the East German edition of 1953, p. 20.

2. Capital, vol. 1 (Kerr ed.), pp. 418-422.

3. Ibid, p. 486.

4. In these notes I am drawing exclusively on my personal experience and acquired knowledge of conditions in the United States. But I believe that what is said applies, in the main, to the other imperialist centers in Western Europe and Japan.

5. Quoted in William V. Shannon, “The Untrustworthy Highway Fund,” The New York Times Magazine (October 15, 1972), p. 121.

6. Unless otherwise stated, all figures come from the Statistical Abstract of the United States, various years.

7. Monopoly Capital (Monthly Review Press, 1966), p. 241 and passim.

8. I grew up in a suburb of this kind. Several years before the First World War my family moved from New York to a suburb across the Hudson River in New Jersey. Our house was around a mile in one direction from the town and the railroad station, about as far away as the commuters then lived. In the other direction, between our house and the River (which, except for the underwater Hudson Tube between lower Manhattan and the Newark/Jersey City urban area, could only be crossed by ferry in those days), there was more than a mile of untouched woodland. The spread of the automobile and the building of the George Washington Bridge across the Hudson totally transformed the region and its relation to the city in the manner analyzed in the text.

9. David S. Landes, The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present (Cambridge University Press, 1969), p. 442.

10. Calculated from Historical Statistics of the United States Colonial Times to 1957 (U.S. Government Printing Office, 2nd Printing, 1961), pp. 7, 139. The figure for 1908 is not exactly comparable to that for 1924 since the relevant National Income is the average for the years 1907-1911.

11. Ibid, p. 462.

12. Ibid, p. 458. The increase was down to 42 percent for the decade of the 1940s owing to the drastic curtailment of new construction during the Second World War, and comparable figures do not appear to be available for 1960 and 1970.

13. A ranking of U.S. manufacturing industries by ten-year average rate of return on capital (for the decade 1949-1958) shows Motor Vehicles and Parts first with 28.2 percent, while the second ranked industry trails with 23.2 percent. B. C. Minhas, An International Comparison of Factor Costs and Factor Use (Department of Economics, Stanford University, 1960), p. 80.

14. John Jerome, The Death of the Automobile (New York: W. W. Norton, 1972), p. 112. The title of Jerome’s book, for better or worse, reflects wishful thinking more than fact, actual or prospective.

15. The following passage from John Jerome’s lively study, cited in the previous footnote, illustrates the change in the public attitude toward roadbuilding which is now under way. Back in 1956, he points out, the roadbuilders exulted in the magnitude of their works: “How the press releases rolled! Four hundred square miles of pavement! One and a half million acres of new right of way! Excavations to bury Connecticut knee deep. Sand, gravel, and stone to build a wall around the world fifty feet wide and nine feet high. Concrete enough for six sidewalks to the moon …. [B]y 1971, local lawsuits or local government action had halted the construction of Interstate projects in fifteen major American cities …. It had become virtually impossible to gain acceptance for a new Interstate in any urban area, and many rural segments of the plan … were in trouble…. The sea change in the American mood is precisely characterized by the Bureau of Roads’ press releases. When the Interstate was initiated, consumption of a million and a half acres of right of way or four hundred square miles of forest was fit material for boasting; now it has become a shameful admission.” Ibid, pp. 105-106. This changing public attitude doubtless portends other significant changes in the period ahead. This is a subject, however, which falls outside the scope of the present essay.

16. Ibid, p. 113.

17. It is true that what are now sometimes called exurbs, lying 50 miles or more from the city center, have some of the characteristics of the older type suburbs. But there are no structural features such as were imposed by dependence on rail transport which protect them from being swallowed up in their turn. This indeed seems likely to be their ultimate fate as long as population continues to grow and there is no basic change in the socio-economic system.

18. The Boston-Washington region—which includes New York, Philadelphia, and Baltimore, as well as a number of lesser but still large cities—has been subjected to intensive study by the French geographer Jean Gottmann (Megalopolis: The Urbanized Northeastern Seaboard of the United States, New York, 1961). Gottmann naturally has to deal with the automobile in many contexts, but he appears not to be aware of its decisive role in the dynamics of the process under study, a fact which is perhaps best explained by the book’s total lack of any coherent theoretical framework.

19. In the language of North American urban planners, “developed” land is that which is actually used for any urban purpose (including parks), while all other land within the urban area is “open” or “undeveloped.”

20. Hans Blumenfeld, “Criteria for Judging the Quality of the Urban Environment,” The Canadian Architect (November, 1972), p. 47.

21. This is without taking into account the social and environmental pathology of the decaying inner city.

22. Let me add that this limitation of scope has also precluded more than passing allusions to the qualitative aspects of that condition. In particular the differential impact of automobilized urbanization on various income levels and social groups has been almost totally omitted. The poor who cannot afford cars and the elderly and handicapped who are unable to make use of them regardless of their income are either effectively immobilized or confined to very limited and usually decaying areas. This adds a tragic dimension of helplessness and misery to millions of already blighted lives.

23. In making judgments of this kind one is likely to be influenced by one’s personal experience. I live in the New York metropolitan area in what used to be an old-style suburb. With a suitable improvement in the commuter railroad service and the inner-city subway-bus-taxi network—both of which are now in bad shape—I can easily imagine that I would hardly ever be tempted to drive into the downtown area. On the other hand, I also find it hard to imagine even an elaborate public transportation system which would satisfactorily substitute for the private car in the various other kinds of movement that are necessary for everyday living in the metropolis.

[tags]Paul M. Sweezy, paul sweezy, monthly review, cars and cities, rise of the automobile, modern modes of production, on cars, relation between cars and cities, environment, environmental considerations, rise of the suburbs, city infrastructure, capitalism, socialism[/tags]

The Corruption of Larry Summers

The Article: Obama’s Top Economic Adviser Is Greedy and Highly Compromised by Matt Taibbi.

The Text:

But Summers, a leading architect of the administration’s economic policies and response to the global recession, appears to have collected the most income. Financial institutions including JP Morgan, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form.” — Washingtonpost.com

So I guess that $45,000 speaking fee from Merrill Lynch wasn’t technically a bribe because Summers wasn’t named to Obama’s economic transition team until Nov. 24 — a full 12 days later. I’m sure Larry Summers had absolutely no inkling whatsoever that he was going to be one of the key advisers to the new administration on Nov. 12.

It likewise makes perfect sense that Merrill Lynch, a company just months removed from having to be rescued from bankruptcy by an 11th-hour, pseudo-state-subsidized buyout by Bank of America, would decide to spend $45,000 on a speaking appearance by Summers because, well, they really valued his economic expertise and his proven ability to rally the troops with his stirring rhetoric.

It certainly had nothing to do with the fact that a) it was eight days after a Democrat was elected to the presidency; b) Summers had a long history of being one of the key policymakers in Democratic Party politics; and c) Merrill was absolutely not going to survive more than a few more months unless taxpayers forked over another 20 billion or so to cover the giant hole in Merrill’s balance sheet that was, at that time, still being hidden from Bank of America and its shareholders.

And how about that $135,000 appearance for Goldman Sachs in April, when Summers was already involved with Democratic Party politics again? That wasn’t a surreptitious campaign contribution at all!

But you have to give Goldman credit: it sure is thorough. It literally leaves no stone unturned.

One has to love the sequence of events here. Back in 2004, Goldman chief Hank Paulson goes to SEC chief William Donaldson and petitions to have lending restrictions relaxed for the top five investment banks. Donaldson rolls over, the restrictions are relaxed, and it’s a disaster, as the top five banks immediately overleverage themselves — two of the five, Bear Stearns and Lehman, would actually collapse, at least partially as a result of being insanely overleveraged.

In the midst of this disaster, Paulson is named Treasury secretary. He does nothing about the worsening financial crisis until it is far too late, then allows one of Goldman’s biggest competitors, Lehman, to fail while at the same time intervening on a huge scale to save AIG, which just happens to owe Goldman a ton of money.

When AIG is bailed out, its government regulator is not in the room, but the new chief of Goldman, Lloyd Blankfein, is. In fact, Goldman Sachs ultimately receives about $13 billion of the money paid to AIG by the government in the bailout, reportedly getting paid 100 cents on the dollar for its AIG exposure, despite the fact that the bank claimed it wasn’t going to suffer severe losses if AIG collapsed.

Later, another former Goldman executive, Ed Liddy, is installed as head of AIG — which just happens to get bailed out twice more, the last time to the tune of $30 billion.

The last two bailouts of AIG take place after a former Goldman chief, Robert Rubin (who, incidentally, helped start this mess by ramming through a series of i-banker wet-dream deregulatory moves as Treasury secretary for Clinton in the 1990s), is named to the Obama transition team, joining Summers (who had already taken $135,000 from Goldman that year) and Timothy Geithner (a protege of another Goldman alum, John Thain, former president and chief operating officer and notorious scumbag).

When it comes time for new Treasury Secretary Geithner to name a chief of staff, he chooses Mark Patterson, who is less than a year removed from working as a lobbyist for … Goldman Sachs. Patterson’s great contribution to society as a Goldman lobbyist was opposing a 2007 measure introduced in the Senate by presidential candidate Barack Obama to rein in executive compensation.

I remember watching Obama the presidential candidate give a speech in Mason City, Iowa, in 2007. Obama had made a big show of not having registered lobbyists working for his campaign, and he promised that lobbyists “won’t work in my White House.” The line was a hit and became part of Obama’s stump speech. I must have heard it two dozen times.

A little over a year later, he put a registered lobbyist of a bailed-out investment bank into a job whose primary responsibility is administering bailout money.

It gets worse. According to a Glenn Greenwald piece I just read, even Gary Gensler is a former Goldman employee. That absolutely blows my mind. Genlser is Obama’s choice to head the Commodities Futures Trading Commission, whose purview is the derivatives market. The CFTC was the battleground where ages ago Rubin, Summers, and then-Rubin aide Gensler teamed up to whack CFTC chief Brooksley Born, who had serious concerns about the burgeoning derivatives market, in particular the credit-default swap market. Rubin overturned Born’s recommendations, and derivatives were freed from most regulation. That economic Alamo led almost directly to the AIG disaster.

Think about this for a moment. A former Goldman chief, Rubin, presses the CFTC to deregulate a type of derivative contract whose chief benefit to an investment bank like Goldman is that it allows it to lend more — the CDS being most useful as a tool to move investment risk off a bank’s balance sheet.

Then another Goldman chief, Paulson, pushes for further relaxation of lending limits. Then Goldman jumps head first into the housing bubble, buying tens of billions in CDS protection to hedge its crazy investments. This massive explosion in lending by banks like Goldman, fueled in part by the use of derivatives like CDS and fueled still more by the 2004 change in rules, puts an enormous strain on the economy, leading to giant holes blown in its hull by the end of 2007 and on through 2008.

It follows that when Goldman’s chief partner in those CDS deals, AIG, collapses as part of this wave of crashes, Paulson — now Treasury secretary — rushes to the rescue, pumping billions in taxpayer money into AIG that is quickly funneled to Goldman. Then a Goldman alum is put in charge of AIG, while another bunch of Goldman alums funnels still more bailout money to AIG, and yet another Goldman alum is put in charge of regulating the derivatives market that is the focus of most of the bailout efforts.

In the midst of all of this, something amazing happens. Goldman Sachs, along with Bank of America, Morgan Stanley and a host of other “troubled” banks, reports a profit for its first quarter in 2009! How and why that happened is another fascinating story, for another time. For now, the only thing to remember is that all the ones who got us into this mess — Rubin, Summers, Goldman in general — are now being put in charge of the cleanup by a president who spent most of 18 months on the campaign trail pledging to end the influence of money in politics.

Add this to the obscene giveaway that is the toxic assets program Geithner has just devised (Goldman Sachs “expressed interest in participating in the plan as an investor,” according to the Wall Street Journal), and you have an amazing situation. Between the Bush and Obama administrations, you have a bailout program that has now figured three ways to funnel money to Goldman Sachs: via AIG, via TARP and now via this trillion-dollar “public-private investment program,” which basically lends huge amounts of money to investors and provides guarantees against heavy losses. It’s free money, state-subsidized profiteering at its most naked.

I hear all the time from people who complain that it’s naive to wonder why we put Wall Street executives in charge of policing Wall Street — that this is actually quite a sensible policy, because we need people with experience in that world making these decisions.

The reason people say this has nothing to do with reality and everything to do with the fact that the financial markets are intimidatingly complex. When Enron buys a seat at the table to conduct energy policy under the Bush administration, everyone knows what that is. When Reagan hires notorious union busters to run the National Labor Relations Board, everyone knows what that is. And when we hire investment bankers to run banking policy, and put investment bankers in charge of handing out bailout money to investment banks, we ought to know what that is. But for some reason we don’t seem to see it the same way, not as clearly.

In my mind this officially ends the Obama honeymoon. I can maybe see one or two of these creeps in key positions. But this many — it’s an undeniable pattern. He put William Lynn, a former Raytheon lobbyist, in the Pentagon as deputy defense secretary. A lot of people squawked about Obama’s early lean toward John Brennan as CIA director because of his role in establishing the “enhanced interrogation” policies, but to me more significant was the fact that Brennan was the former chairman of the Intelligence and National Security Alliance, which is sort of like the chamber of commerce of intelligence contractors.

Most importantly, I’m sensing in these economic appointments a kind of drearily cynical parsing of the approval-ratings situation — Obama knows he’s still flying high with the “Yes We Can!” T-shirt crowd and knows that most people simply are not going to give a shit if he packs his Treasury Department with Goldman alums and lobbyists, despite the fact that he explicitly promised to do otherwise.

See Also: Larry Summers On Good Friday, Give Us 6 Words, and We Just Might Give You 100 Bucks, Larry Meets The Unimpressed, Obama: Stop protecting Wall Street bankers from Main Street, Larry Summers Protest, Protesters Heckle Obama Economic Adviser, Summers Defends Role in Bank Deregulation, Government Sachs has strengthened its position through bailout, and Mission Creep: The Incredible Expanding Power to Bailout.

[tags]larry summers, economic policy, economic advisor, barack obama, economic adviser, corruption, goldman sachs, bribes, aig, de shaw[/tags]

The Big Fuckover

The Article: The Big Takeover: The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution by Matt Taibbi in Rolling Stone.

The Text: It’s over — we’re officially, royally fucked. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).

So it’s time to admit it: We’re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we’re still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company’s CEO, actually compared it to catching a cold: “The marketplace is a pretty crummy place to be right now,” he said. “When the world catches pneumonia, we get it too.” In a pathetic attempt at name-dropping, he even whined that AIG was being “consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet’s investment portfolio down.”

Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone else’s financial weather. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its “pneumonia” was making colossal, world-sinking $500 billion bets with money it didn’t have, in a toxic and completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

I. PATIENT ZERO

The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people’s money would make his dick bigger.

That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington’s deregulation of the Wall Street casino. “It’s all about the regulatory environment,” says a government source involved with the AIG bailout. “These guys look for holes in the system, for ways they can do trades without government interference. Whatever is unregulated, all the action is going to pile into that.”

The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows into the box.

The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you’ll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or “tranche.” They then convinced ratings agencies like Moody’s and S&P to give that top tranche the highest AAA rating — meaning it has close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible. Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them.

The problem was, none of this was based on reality. “The banks knew they were selling crap,” says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were. “They had some back room somewhere where a bunch of Indian guys who’d been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years,” says one young trader who sold CDOs for a major investment bank. “It was nuts.”

Now that even the crappiest mortgages could be sold to conservative investors, the CDOs spurred a massive explosion of irresponsible and predatory lending. In fact, there was such a crush to underwrite CDOs that it became hard to find enough subprime mortgages — read: enough unemployed meth dealers willing to buy million-dollar homes for no money down — to fill them all. As banks and investors of all kinds took on more and more in CDOs and similar instruments, they needed some way to hedge their massive bets — some kind of insurance policy, in case the housing bubble burst and all that debt went south at the same time. This was particularly true for investment banks, many of which got stuck holding or “warehousing” CDOs when they wrote more than they could sell. And that’s were Joe Cassano came in.

Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He was the favorite of Maurice “Hank” Greenberg, the head of AIG, who admired the younger man’s hard-driving ways, even if neither he nor his successors fully understood exactly what it was that Cassano did. According to a source familiar with AIG’s internal operations, Cassano basically told senior management, “You know insurance, I know investments, so you do what you do, and I’ll do what I do — leave me alone.” Given a free hand within the company, Cassano set out from his offices in London to sell a lucrative form of “insurance” to all those investors holding lots of CDOs. His tool of choice was another new financial instrument known as a credit-default swap, or CDS.

The CDS was popularized by J.P. Morgan, in particular by a group of young, creative bankers who would later become known as the “Morgan Mafia,” as many of them would go on to assume influential positions in the finance world. In 1994, in between booze and games of tennis at a resort in Boca Raton, Florida, the Morgan gang plotted a way to help boost the bank’s returns. One of their goals was to find a way to lend more money, while working around regulations that required them to keep a set amount of cash in reserve to back those loans. What they came up with was an early version of the credit-default swap.

In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can’t make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope’s mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.

When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street.

What Cassano did was to transform the credit swaps that Morgan popularized into the world’s largest bet on the housing boom. In theory, at least, there’s nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn’t have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don’t have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called “naked” CDS deals. In a “naked” CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A’s mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else’s house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn’t have the cash to pay off if the kick went wide.

In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64 billion of that tied to the subprime mortgage market. AIG didn’t have even a fraction of that amount of cash on hand to cover its bets, but neither did it expect it would ever need any reserves. So long as defaults on the underlying securities remained a highly unlikely proposition, AIG was essentially collecting huge and steadily climbing premiums by selling insurance for the disaster it thought would never come.

Initially, at least, the revenues were enormous: AIGFP’s returns went from $737 million in 1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary’s 400 employees were paid a total of $3.5 billion; Cassano himself pocketed at least $280 million in compensation. Everyone made their money — and then it all went to shit.

II. THE REGULATORS

Cassano’s outrageous gamble wouldn’t have been possible had he not had the good fortune to take over AIGFP just as Sen. Phil Gramm — a grinning, laissez-faire ideologue from Texas — had finished engineering the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in 806 A.D. For years, Washington had kept a watchful eye on the nation’s banks. Ever since the Great Depression, commercial banks — those that kept money on deposit for individuals and businesses — had not been allowed to double as investment banks, which raise money by issuing and selling securities. The Glass-Steagall Act, passed during the Depression, also prevented banks of any kind from getting into the insurance business.

But in the late Nineties, a few years before Cassano took over AIGFP, all that changed. The Democrats, tired of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on unions and interest groups and become more “business-friendly.” Wall Street responded by flooding Washington with money, buying allies in both parties. In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn’t going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks — which, thanks to Gramm, were now competing directly with investment banks for customers — were driven to buy credit swaps to loosen capital in search of higher yields. “By ruling that credit-default swaps were not gaming and not a security, the way was cleared for the growth of the market,” said Eric Dinallo, head of the New York State Insurance Department.

The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted, building up as huge a position as he wanted, without anyone in government saying a word. “You have to remember, investment banks aren’t in the business of making huge directional bets,” says the government source involved in the AIG bailout. When investment banks write CDS deals, they hedge them. But insurance companies don’t have to hedge. And that’s what AIG did. “They just bet massively long on the housing market,” says the source. “Billions and billions.”

In the biggest joke of all, Cassano’s wheeling and dealing was regulated by the Office of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts (better known as savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999, AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of its entire operation.

Making matters even more hilarious, AIGFP — a London-based subsidiary of an American insurance company — ought to have been regulated by one of Europe’s more stringent regulators, like Britain’s Financial Services Authority. But the OTS managed to convince the Europeans that it had the muscle to regulate these giant companies. By 2007, the EU had conferred legitimacy to OTS supervision of three mammoth firms — GE, AIG and Ameriprise.

That same year, as the subprime crisis was exploding, the Government Accountability Office criticized the OTS, noting a “disparity between the size of the agency and the diverse firms it oversees.” Among other things, the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite the fact that it was the primary regulator for the world’s largest insurer!

“There’s this notion that the regulators couldn’t do anything to stop AIG,” says a government official who was present during the bailout. “That’s bullshit. What you have to understand is that these regulators have ultimate power. They can send you a letter and say, ‘You don’t exist anymore,’ and that’s basically that. They don’t even really need due process. The OTS could have said, ‘We’re going to pull your charter; we’re going to pull your license; we’re going to sue you.’ And getting sued by your primary regulator is the kiss of death.”

When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the insurance giant — a guy named C.K. Lee — basically admitted that he had blown it. His mistake, Lee said, was that he believed all those credit swaps in Cassano’s portfolio were “fairly benign products.” Why? Because the company told him so. “The judgment the company was making was that there was no big credit risk,” he explained. (Lee now works as Midwest region director of the OTS; the agency declined to make him available for an interview.)

In early March, after the latest bailout of AIG, Treasury Secretary Timothy Geithner took what seemed to be a thinly veiled shot at the OTS, calling AIG a “huge, complex global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision.” But even without that “adult supervision,” AIG might have been OK had it not been for a complete lack of internal controls. For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company — like, for instance, how much exposure the firm had to the residential-mortgage market.

III. THE CRASH

Ironically, when reality finally caught up to Cassano, it wasn’t because the housing market crapped but because of AIG itself. Before 2005, the company’s debt was rated triple-A, meaning he didn’t need to post much cash to sell CDS protection: The solid creditworthiness of AIG’s name was guarantee enough. But the company’s crummy accounting practices eventually caused its credit rating to be downgraded, triggering clauses in the CDS contracts that forced Cassano to post substantially more collateral to back his deals.

By the fall of 2007, it was evident that AIGFP’s portfolio had turned poisonous, but like every good Wall Street huckster, Cassano schemed to keep his insane, Earth-swallowing gamble hidden from public view. That August, balls bulging, he announced to investors on a conference call that “it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions.” As he spoke, his CDS portfolio was racking up $352 million in losses. When the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant named Joseph St. Denis became “gravely concerned” about the CDS deals and their potential for mass destruction. Cassano responded by personally forcing the poor sap out of the firm, telling him he was “deliberately excluded” from the financial review for fear that he might “pollute the process.”

The following February, when AIG posted $11.5 billion in annual losses, it announced the resignation of Cassano as head of AIGFP, saying an auditor had found a “material weakness” in the CDS portfolio. But amazingly, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. In fact, Cassano remained on the payroll and kept collecting his monthly million through the end of September 2008, even after taxpayers had been forced to hand AIG $85 billion to patch up his fuck-ups. When asked in October why the company still retained Cassano at his $1 million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG wanted to “retain the 20-year knowledge that Mr. Cassano had.” (Cassano, who is apparently hiding out in his lavish town house near Harrods in London, could not be reached for comment.)

What sank AIG in the end was another credit downgrade. Cassano had written so many CDS deals that when the company was facing another downgrade to its credit rating last September, from AA to A, it needed to post billions in collateral — not only more cash than it had on its balance sheet but more cash than it could raise even if it sold off every single one of its liquid assets. Even so, management dithered for days, not believing the company was in serious trouble. AIG was a dried-up prune, sapped of any real value, and its top executives didn’t even know it.

On the weekend of September 13th, AIG’s senior leaders were summoned to the offices of the New York Federal Reserve. Regulators from Dinallo’s insurance office were there, as was Geithner, then chief of the New York Fed. Treasury Secretary Hank Paulson, who spent most of the weekend preoccupied with the collapse of Lehman Brothers, came in and out. Also present, for reasons that would emerge later, was Lloyd Blankfein, CEO of Goldman Sachs. The only relevant government office that wasn’t represented was the regulator that should have been there all along: the OTS.

“We sat down with Paulson, Geithner and Dinallo,” says a person present at the negotiations. “I didn’t see the OTS even once.”

On September 14th, according to another person present, Treasury officials presented Blankfein and other bankers in attendance with an absurd proposal: “They basically asked them to spend a day and check to see if they could raise the money privately.” The laughably short time span to complete the mammoth task made the answer a foregone conclusion. At the end of the day, the bankers came back and told the government officials, gee, we checked, but we can’t raise that much. And the bailout was on.

A short time later, it came out that AIG was planning to pay some $90 million in deferred compensation to former executives, and to accelerate the payout of $277 million in bonuses to others — a move the company insisted was necessary to “retain key employees.” When Congress balked, AIG canceled the $90 million in payments.

Then, in January 2009, the company did it again. After all those years letting Cassano run wild, and after already getting caught paying out insane bonuses while on the public till, AIG decided to pay out another $450 million in bonuses. And to whom? To the 400 or so employees in Cassano’s old unit, AIGFP, which is due to go out of business shortly! Yes, that’s right, an average of $1.1 million in taxpayer-backed money apiece, to the very people who spent the past decade or so punching a hole in the fabric of the universe!

“We, uh, needed to keep these highly expert people in their seats,” AIG spokeswoman Christina Pretto says to me in early February.

“But didn’t these ‘highly expert people’ basically destroy your company?” I ask.

Pretto protests, says this isn’t fair. The employees at AIGFP have already taken pay cuts, she says. Not retaining them would dilute the value of the company even further, make it harder to wrap up the unit’s operations in an orderly fashion.

The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age, namely the fact that, even with the planet in flames, some members of the Wall Street class can’t even get used to the tragedy of having to fly coach. “These people need their trips to Baja, their spa treatments, their hand jobs,” says an official involved in the AIG bailout, a serious look on his face, apparently not even half-kidding. “They don’t function well without them.”

IV. THE POWER GRAB

So that’s the first step in wall street’s power grab: making up things like credit-default swaps and collateralized-debt obligations, financial products so complex and inscrutable that ordinary American dumb people — to say nothing of federal regulators and even the CEOs of major corporations like AIG — are too intimidated to even try to understand them. That, combined with wise political investments, enabled the nation’s top bankers to effectively scrap any meaningful oversight of the financial industry. In 1997 and 1998, the years leading up to the passage of Phil Gramm’s fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone — then the chairman of the Senate Banking Committee — collected $2.6 million in only five years. The law passed 90-8 in the Senate, with the support of 38 Democrats, including some names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.

The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America — and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures. “We’re moving to an oligopolistic situation,” Kenneth Guenther, a top executive with the Independent Community Bankers of America, lamented after the Gramm measure was passed.

The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote. At the time, the European Union was threatening to more strictly regulate the foreign operations of America’s big investment banks if the U.S. didn’t strengthen its own oversight. So the top five investment banks got together on April 28th of that year and — with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson — made a pitch to George Bush’s SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision.

Donaldson OK’d the proposal, and the new rules were enough to get the EU to drop its threat to regulate the five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. They named a commission of seven people to oversee the five companies, whose combined assets came to total more than $4 trillion. But in the last year and a half of Cox’s tenure, the group had no director and did not complete a single inspection. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.

Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the then-raging housing bubble. One of those was Bear Stearns, which used its freedom to drown itself in bad mortgage loans. In the short period between the 2004 change and Bear’s collapse, the firm’s debt-to-equity ratio soared from 12-1 to an insane 33-1. Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary.

Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman jumped into the housing craze just like everyone else on Wall Street. Although it famously scored an $11 billion coup in 2007 when one of its trading units smartly shorted the housing market, the move didn’t tell the whole story. In truth, Goldman still had a huge exposure come that fateful summer of 2008 — to none other than Joe Cassano.

Goldman Sachs, it turns out, was Cassano’s biggest customer, with $20 billion of exposure in Cassano’s CDS book. Which might explain why Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite Hank Paulson that weekend of September 13th, when the federal government was supposedly bailing out AIG.

When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. “One might say that it’s because Goldman had so much exposure to AIGFP’s portfolio,” he says. “You’ll never prove that, but one might suppose.”

Market analyst Eric Salzman is more blunt. “If AIG went down,” he says, “there was a good chance Goldman would not be able to collect.” The AIG bailout, in effect, was Goldman bailing out Goldman.

Eventually, Paulson went a step further, elevating another ex-Goldmanite named Edward Liddy to run AIG — a company whose bailout money would be coming, in part, from the newly created TARP program, administered by another Goldman banker named Neel Kashkari.

V. REPO MEN

There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. But when Goldman Sachs — a company whose average employee still made more than $350,000 last year, even in the midst of a depression — was suddenly faced with the possibility of losing money on the unregulated insurance deals it bought for its insane housing bets, the government was there in an instant to patch the hole. That’s the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers’ credit card.

The people who have spent their lives cloistered in this Wall Street community aren’t much for sharing information with the great unwashed. Because all of this shit is complicated, because most of us mortals don’t know what the hell LIBOR is or how a REIT works or how to use the word “zero coupon bond” in a sentence without sounding stupid — well, then, the people who do speak this idiotic language cannot under any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and asking us to trust them.

That roll of the eyes is a key part of the psychology of Paulsonism. The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize “toxic” risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers.

Some aspects of the bailout were secretive to the point of absurdity. In fact, if you look closely at just a few lines in the Federal Reserve’s weekly public disclosures, you can literally see the moment where a big chunk of your money disappeared for good. The H4 report (called “Factors Affecting Reserve Balances”) summarizes the activities of the Fed each week. You can find it online, and it’s pretty much the only thing the Fed ever tells the world about what it does. For the week ending February 18th, the number under the heading “Repurchase Agreements” on the table is zero. It’s a significant number.

Why? In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the market every week, buying up Treasury bills, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then “repurchase” them in a short period of time, usually one to seven days. This was the Fed’s primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.

If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual — $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion — “out of control now,” according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy — until suddenly, at the start of this year, the number drops to nothing. Zero.

The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you’ve never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there’s also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG.

While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn’t taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

No one knows who’s getting that money or exactly how much of it is disappearing through these new holes in the hull of America’s credit rating. Moreover, no one can really be sure if these new institutions are even temporary at all — or whether they are being set up as permanent, state-aided crutches to Wall Street, designed to systematically suck bad investments off the ledgers of irresponsible lenders.

“They’re supposed to be temporary,” says Paul-Martin Foss, an aide to Rep. Ron Paul. “But we keep getting notices every six months or so that they’re being renewed. They just sort of quietly announce it.”

None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn’t like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include “deliberations, decisions and actions on monetary policy matters.” The exemption, as Foss notes, “basically includes everything.” According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.

VI. WINNERS AND LOSERS

Stevens isn’t the only person in Congress to be given the finger by the Fed. In January, when Rep. Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went — only $1.2 trillion had vanished by then — Kohn gave Grayson a classic eye roll, saying he would be “very hesitant” to name names because it might discourage banks from taking the money.

“Has that ever happened?” Grayson asked. “Have people ever said, ‘We will not take your $100 billion because people will find out about it?'”

“Well, we said we would not publish the names of the borrowers, so we have no test of that,” Kohn answered, visibly annoyed with Grayson’s meddling.

Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was buying assets and making loans, but no one knew how it was pricing those assets — in other words, no one knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased assets were “marked to market” — a methodology that assigns a concrete value to assets, based on the market rate on the day they are traded — Kohn answered, mysteriously, “The ones that have market values are marked to market.” The implication was that the Fed was purchasing derivatives like credit swaps or other instruments that were basically impossible to value objectively — paying real money for God knows what.

“Well, how much of them don’t have market values?” asked Grayson. “How much of them are worthless?”

“None are worthless,” Kohn snapped.

“Then why don’t you mark them to market?” Grayson demanded.

“Well,” Kohn sighed, “we are marking the ones to market that have market values.”

In essence, the Fed was telling Congress to lay off and let the experts handle things. “It’s like buying a car in a used-car lot without opening the hood, and saying, ‘I think it’s fine,'” says Dan Fuss, an analyst with the investment firm Loomis Sayles. “The salesman says, ‘Don’t worry about it. Trust me.’ It’ll probably get us out of the lot, but how much farther? None of us knows.”

When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what’s happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke. “We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but there has been no discussion about who has been receiving this $3 trillion,” says Sen. Bernie Sanders. “It is beyond comprehension.”

Count Sanders among those who don’t buy the argument that Wall Street firms shouldn’t have to face being outed as recipients of public funds, that making this information public might cause investors to panic and dump their holdings in these firms. “I guess if we made that public, they’d go on strike or something,” he muses.

And the Fed isn’t the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn’t — particularly the first $350 billion given out under Bush appointee Hank Paulson.

The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn’t a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.

“Do you believe that?” she says incredulously. “That’s not what we had in mind.”

Another member of Congress, who asked not to be named, offers his own theory about the TARP process. “I think basically if you knew Hank Paulson, you got the money,” he says.

This cozy arrangement created yet another opportunity for big banks to devour market share at the expense of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson on speed-dial got bailed out right away — remember that TARP was originally passed because money had to be lent right now, that day, that minute, to stave off emergency — many small banks are still waiting for help. Five months into the TARP program, some not only haven’t received any funds, they haven’t even gotten a call back about their applications.

“There’s definitely a feeling among community bankers that no one up there cares much if they make it or not,” says Tanya Wheeless, president of the Arizona Bankers Association.

Which, of course, is exactly the opposite of what should be happening, since small, regional banks are far less guilty of the kinds of predatory lending that sank the economy. “They’re not giving out subprime loans or easy credit,” says Wheeless. “At the community level, it’s much more bread-and-butter banking.”

Nonetheless, the lion’s share of the bailout money has gone to the larger, so-called “systemically important” banks. “It’s like Treasury is picking winners and losers,” says one state banking official who asked not to be identified.

This itself is a hugely important political development. In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk.

In essence, Paulson and his cronies turned the federal government into one gigantic, half-opaque holding company, one whose balance sheet includes the world’s most appallingly large and risky hedge fund, a controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing businesses. Like AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by leaders who have very little grasp of the daily operations of its disparate subsidiary operations.

In other words, it’s AIG’s rip-roaringly shitty business model writ almost inconceivably massive — to echo Geithner, a huge, complex global company attached to a very complicated investment bank/hedge fund that’s been allowed to build up without adult supervision. How much of what kinds of crap is actually on our balance sheet, and what did we pay for it? When exactly will the rent come due, when will the money run out? Does anyone know what the hell is going on? And on the linear spectrum of capitalism to socialism, where exactly are we now? Is there a dictionary word that even describes what we are now? It would be funny, if it weren’t such a nightmare.

VII. YOU DON’T GET IT

The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama’s Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner — himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top aide.

In fact, most of Geithner’s early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called “bad bank” that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed’s new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits.

God knows exactly what this does for the taxpayer, but hedge-fund managers sure love the idea. “This is exactly what the financial system needs,” said Andrew Feldstein, CEO of Blue Mountain Capital and one of the Morgan Mafia. Strangely, there aren’t many people who don’t run hedge funds who have expressed anything like that kind of enthusiasm for Geithner’s ideas.

As complex as all the finances are, the politics aren’t hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.

“But wait a minute,” you say to them. “No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what’s left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?”

But before you even finish saying that, they’re rolling their eyes, because You Don’t Get It. These people were never about anything except turning money into money, in order to get more money; valueswise they’re on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

Good luck with that, America. And enjoy tax season.

Analysis: I’ll leave it to James K. Galbraith: “Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature — a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.”

See Also: Putting It In Words You Can Understand, Money matters, “Global Imbalances and the Crisis”, AIG, Neoclassical Economics: Mad Bad and Dangerous to Know, Just When You Thought it was Safe to get Back in the Bonus Pool, Unbelievable: My bank is buying two new top-of-the-line jets while being bailed out by TARP, An American Outrage: Bernie, AIG, and Us, Boards and Perks, and In Other News, Frat Boys React Positively to Plans For Free Beer and Get Out of Jail Free Cards.

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[tags]predatory capitalism, matt taibi, matt taibbi, rolling stone, the big takeover, political economy, derivatives, aig, predatory lending, loans, mortgages, derivative trading, wall street, upper class, elites, lobbyists, financial capitalism, democracy, corruption, global economy, globalization[/tags]

Legalization Is The Answer

The Article: How to stop the drug wars, leading editorial for this weeks Economist.

The Text: A hundred years ago a group of foreign diplomats gathered in Shanghai for the first-ever international effort to ban trade in a narcotic drug. On February 26th 1909 they agreed to set up the International Opium Commission—just a few decades after Britain had fought a war with China to assert its right to peddle the stuff. Many other bans of mood-altering drugs have followed. In 1998 the UN General Assembly committed member countries to achieving a “drug-free world” and to “eliminating or significantly reducing” the production of opium, cocaine and cannabis by 2008.

That is the kind of promise politicians love to make. It assuages the sense of moral panic that has been the handmaiden of prohibition for a century. It is intended to reassure the parents of teenagers across the world. Yet it is a hugely irresponsible promise, because it cannot be fulfilled.

Next week ministers from around the world gather in Vienna to set international drug policy for the next decade. Like first-world-war generals, many will claim that all that is needed is more of the same. In fact the war on drugs has been a disaster, creating failed states in the developing world even as addiction has flourished in the rich world. By any sensible measure, this 100-year struggle has been illiberal, murderous and pointless. That is why The Economist continues to believe that the least bad policy is to legalise drugs.

“Least bad” does not mean good. Legalisation, though clearly better for producer countries, would bring (different) risks to consumer countries. As we outline below, many vulnerable drug-takers would suffer. But in our view, more would gain.

The evidence of failure

Nowadays the UN Office on Drugs and Crime no longer talks about a drug-free world. Its boast is that the drug market has “stabilised”, meaning that more than 200m people, or almost 5% of the world’s adult population, still take illegal drugs—roughly the same proportion as a decade ago. (Like most purported drug facts, this one is just an educated guess: evidential rigour is another casualty of illegality.) The production of cocaine and opium is probably about the same as it was a decade ago; that of cannabis is higher. Consumption of cocaine has declined gradually in the United States from its peak in the early 1980s, but the path is uneven (it remains higher than in the mid-1990s), and it is rising in many places, including Europe.

This is not for want of effort. The United States alone spends some $40 billion each year on trying to eliminate the supply of drugs. It arrests 1.5m of its citizens each year for drug offences, locking up half a million of them; tougher drug laws are the main reason why one in five black American men spend some time behind bars. In the developing world blood is being shed at an astonishing rate. In Mexico more than 800 policemen and soldiers have been killed since December 2006 (and the annual overall death toll is running at over 6,000). This week yet another leader of a troubled drug-ridden country—Guinea Bissau—was assassinated.

Yet prohibition itself vitiates the efforts of the drug warriors. The price of an illegal substance is determined more by the cost of distribution than of production. Take cocaine: the mark-up between coca field and consumer is more than a hundredfold. Even if dumping weedkiller on the crops of peasant farmers quadruples the local price of coca leaves, this tends to have little impact on the street price, which is set mainly by the risk of getting cocaine into Europe or the United States.

Nowadays the drug warriors claim to seize close to half of all the cocaine that is produced. The street price in the United States does seem to have risen, and the purity seems to have fallen, over the past year. But it is not clear that drug demand drops when prices rise. On the other hand, there is plenty of evidence that the drug business quickly adapts to market disruption. At best, effective repression merely forces it to shift production sites. Thus opium has moved from Turkey and Thailand to Myanmar and southern Afghanistan, where it undermines the West’s efforts to defeat the Taliban.

Al Capone, but on a global scale

Indeed, far from reducing crime, prohibition has fostered gangsterism on a scale that the world has never seen before. According to the UN’s perhaps inflated estimate, the illegal drug industry is worth some $320 billion a year. In the West it makes criminals of otherwise law-abiding citizens (the current American president could easily have ended up in prison for his youthful experiments with “blow”). It also makes drugs more dangerous: addicts buy heavily adulterated cocaine and heroin; many use dirty needles to inject themselves, spreading HIV; the wretches who succumb to “crack” or “meth” are outside the law, with only their pushers to “treat” them. But it is countries in the emerging world that pay most of the price. Even a relatively developed democracy such as Mexico now finds itself in a life-or-death struggle against gangsters. American officials, including a former drug tsar, have publicly worried about having a “narco state” as their neighbour.

The failure of the drug war has led a few of its braver generals, especially from Europe and Latin America, to suggest shifting the focus from locking up people to public health and “harm reduction” (such as encouraging addicts to use clean needles). This approach would put more emphasis on public education and the treatment of addicts, and less on the harassment of peasants who grow coca and the punishment of consumers of “soft” drugs for personal use. That would be a step in the right direction. But it is unlikely to be adequately funded, and it does nothing to take organised crime out of the picture.

Legalisation would not only drive away the gangsters; it would transform drugs from a law-and-order problem into a public-health problem, which is how they ought to be treated. Governments would tax and regulate the drug trade, and use the funds raised (and the billions saved on law-enforcement) to educate the public about the risks of drug-taking and to treat addiction. The sale of drugs to minors should remain banned. Different drugs would command different levels of taxation and regulation. This system would be fiddly and imperfect, requiring constant monitoring and hard-to-measure trade-offs. Post-tax prices should be set at a level that would strike a balance between damping down use on the one hand, and discouraging a black market and the desperate acts of theft and prostitution to which addicts now resort to feed their habits.

Selling even this flawed system to people in producer countries, where organised crime is the central political issue, is fairly easy. The tough part comes in the consumer countries, where addiction is the main political battle. Plenty of American parents might accept that legalisation would be the right answer for the people of Latin America, Asia and Africa; they might even see its usefulness in the fight against terrorism. But their immediate fear would be for their own children.

That fear is based in large part on the presumption that more people would take drugs under a legal regime. That presumption may be wrong. There is no correlation between the harshness of drug laws and the incidence of drug-taking: citizens living under tough regimes (notably America but also Britain) take more drugs, not fewer. Embarrassed drug warriors blame this on alleged cultural differences, but even in fairly similar countries tough rules make little difference to the number of addicts: harsh Sweden and more liberal Norway have precisely the same addiction rates. Legalisation might reduce both supply (pushers by definition push) and demand (part of that dangerous thrill would go). Nobody knows for certain. But it is hard to argue that sales of any product that is made cheaper, safer and more widely available would fall. Any honest proponent of legalisation would be wise to assume that drug-taking as a whole would rise.

There are two main reasons for arguing that prohibition should be scrapped all the same. The first is one of liberal principle. Although some illegal drugs are extremely dangerous to some people, most are not especially harmful. (Tobacco is more addictive than virtually all of them.) Most consumers of illegal drugs, including cocaine and even heroin, take them only occasionally. They do so because they derive enjoyment from them (as they do from whisky or a Marlboro Light). It is not the state’s job to stop them from doing so.

What about addiction? That is partly covered by this first argument, as the harm involved is primarily visited upon the user. But addiction can also inflict misery on the families and especially the children of any addict, and involves wider social costs. That is why discouraging and treating addiction should be the priority for drug policy. Hence the second argument: legalisation offers the opportunity to deal with addiction properly.

By providing honest information about the health risks of different drugs, and pricing them accordingly, governments could steer consumers towards the least harmful ones. Prohibition has failed to prevent the proliferation of designer drugs, dreamed up in laboratories. Legalisation might encourage legitimate drug companies to try to improve the stuff that people take. The resources gained from tax and saved on repression would allow governments to guarantee treatment to addicts—a way of making legalisation more politically palatable. The success of developed countries in stopping people smoking tobacco, which is similarly subject to tax and regulation, provides grounds for hope.

A calculated gamble, or another century of failure?

This newspaper first argued for legalisation 20 years ago. Reviewing the evidence again, prohibition seems even more harmful, especially for the poor and weak of the world. Legalisation would not drive gangsters completely out of drugs; as with alcohol and cigarettes, there would be taxes to avoid and rules to subvert. Nor would it automatically cure failed states like Afghanistan. Our solution is a messy one; but a century of manifest failure argues for trying it.

See Also: Pomegranates for poppies, Want to save Mexico? Rethink drug policy, Cartels’ Overwhelming Force, Intimidating Implications, If The War on Drugs Is a Success, What Does Failure Look Like?, Pot Bust Flip-Flop in LA; Obama & Holder Must Clarify RxPot Policy Now, The Economist: legalization “least bad” way to deal with failed drug prohibition, Pat Buchanan on the Drug War, and As Drug War Rages, AZ AG Talks Gun Control and the Benefits of Legalization.

[tags]drug wars, economist, legalization, legalisation, cocaine, marijuana, opium, production, developing nations, drug battles, legalize drugs, america, united states, DEA, drug enforcement, drug policy, decriminalize[/tags]