Reconsidering Constitutional Theory in the Global Age: Structure, Finance, and Representation
IN THIS ARTICLE
We live in a time today similar to the beginning of the 20th century; then, industrial forces were rapidly changing (as seen in the industrial revolution and the rise of the Western nation-state) in ways that parallel our current state of economic transformation. Every day we witness the world shrink as these changes have enabled the imminent globalization of our economic markets – and necessarily the emergence of our global society. Reason concludes and history shows that agency structures, legislated in 1913 and intended to combat similar economic changes from a century ago, cannot apply in our world. These are forces that our society, as with any advanced society, must account for; otherwise rhetorical slander disseminated by a privileged class could easily undermine the Constitutionally enforced obligation between public representatives and public authority. Because the United States is (arguably) the current hegemon of the international system, its behavior will unavoidably have a great deal of influence on the development of our emerging global society. America, therefore, is largely responsible for securing our community’s liberty of self-government; a liberty essential to human rights (individual liberties) and the sustainability of collective progress and the better way of life that it usually creates. Failure will render our attempt at reaching the ideal another chapter in history textbooks, and future citizens, enlightened as they will be, will think, “almost” or “nice try” in the same way that Athenian and Roman democracy is generally perceived today.
"Every man the least conversant in Roman story, knows how often that republic was obliged to take refuge in the absolute power of a single man, under the formidable title of Dictator, as well against the intrigues of ambitious individuals who aspired to the tyranny, and the seditions of whole classes of the community whose conduct threatened the existence of all government, as against the invasions of external enemies who menaced the conquest and destruction of Rome." - Alexander Hamilton, Federalist 70
Prudence dictates that blaming these obstacles on a scapegoat is counter-productive; in fact creating collective blame benefits such regimes by diverting public concern away from already translucent issues of structural change. This is a signifying behavior of despotic government, as seen in Hitler’s use of the final solution while attempting to revive the German economy. The goal of my research is to prove that socio-economic changes have rendered the U.S. Senate corrupt, in need of reform, and that any legislative action must represent the people’s will. Only after we understand the meaning of civilization, and how progress relates to the changes that accompany civilized life, can we rationally amend for these problems. We cannot achieve such an understanding until we comprehend what it means to be a republic, a representative, and a federal Senator. Once such knowledge is acquired, however, we can appropriately deal with any uncertainties and obstacles that arise from living in a increasingly chaotic world, for together we are strong.
Integrity is a mandatory quality for any representational government because such a government transfers collective authority to individual agents, and indeed Garrison affirms that “the idea that public office is a public trust, derived from the people and answerable to the people” (228). Moreover, Garrison’s work is an argument for the first Senate reformation; he contends that the breakdown of trust between Senators and their constituents engendered a corrupting effect on the entire federal system, and most prevalently on the Senate. As public faith dissolved, the Senate went from “a model of legislative dignity, capacity, and behavior” made up of “the class competent to govern” to a “medley of millionaires, ‘bosses,’ and the representatives of selfish interests” (228). This breakdown prolonged party existence, produced artificial divisions in local matters, and made party felicity, not competence, honesty or patriotism the credential for office holding. This directly preceded and contributed to the “growth of machine rule, the purchasability of senatorships, and the decline of the Federal Senate to what we now see it…” (228). Widespread public distrust is a product of inefficient agency relations, because agency relaxations are derived from bureaucratic structures defined in a social contract. Bureaucratic structuring defines Senatorial duties and personnel, but sometimes require revisions if the relevant socio-political climate dictates such a necessity. Senatorial re-structuring has successfully occurred before; most notably seen in the legislations of 1913, which restored Senatorial trust by defining and aligning new agency relations in a way that allowed the nation to recreate a sustainable, relatively long term and productively efficient economic system.
Adjusting constitutional policy is not revolutionary by nature, as peaceful methods for amending the Constitution are explicitly provided for in the social contract. Our founders learned that, on occasion, legislative bylaws need to be re-written such that our invaluable republican principles are not usurped by a corrupting or otherwise tyrannical agent or class. The authors of the Constitution lived in a time when collective social progress rendered older and deeply indoctrinated social norms obsolete. They experienced firsthand the discomfort of unfavorable social regimes; regimes caused by unresolved issues of outdated agency relations, and perpetuated by the increasing emergence of self-interested political corruption. When corruption proliferates to the point that individual or communal liberties are violated in legislation, violent struggle and extremist factions become more prevalent. They saw, as we do now, reform as a matter of necessity – we reform bureaucratic procedure to prevent the rise of a tyranny, it is a matter of individual and national security.
A common misconception is that our Senate is merely “a club of millionaires,” and these are often the grounds upon which Senators are accused of corruption. However, examination will show that “such a consummation would not have displeased…the framers of the Constitution” (Garrison 226). Moreover, it is the violation of Senatorial trust, as was the case 100 years ago, that is the root of today’s congressional issues. Unsurprisingly this corruption has precipitated similar effects, including: the aggrandizement of parties, the growth of machine rule, the purchasability of senatorships, and most importantly, the loss of competence, honest, and patriotism in our representatives (Garrison 228). Today we see issues such as rigid, bipolar, nearly un-crossable party lines; examples of attempts to sell vacant seats; and evidence that a large percentage of Senators engage in highly profitable insider trading, which far, almost inconceivably, exceeds the returns of a normal investor (Ziobrowski, Cheng, and Boyd). (Conveniently, insider trading is not illegal for Senators).
I. Civilizations and Progress
“Is it not time to awake from the deceitful dream of a golden age, and to adopt as a practical maxim for the direction of our political conduct, that we, as well as the other inhabitants of the globe, are yet remote from the happy empire of perfect wisdom and perfect virtue?” –Alexander Hamilton, Fed 6.
‘Progress’ occurs when the maxims of the political institutions and prevailing sentiments in a given society are aligned with the gradual, often hidden causes of advancement. Alignment occurs once the collective behaviors and beliefs and relations of a society, products of the prevailing economic system, are manifested in the foundation of its bureaucratic structure. When discord between policy and ‘the forces of progress’ prevail, we encounter problems like corruption and despotism; meaning that an understanding of the causes of over-arching societal change are vital if we are to govern effectively.
Karl Marx’s dialectic history is the most insightful conception of civilization given the context of this research because it speaks in the language of economic forces, the forces most at work today. This theory will allow us to identify the relevant issues precipitating congressional inefficiencies. While studying the tendencies of capitalism, Marx developed a theory called “the materialist conception of history.” This theory contends:
"People in a society, at any given time, have a certain level of productive ability. This depends on their own knowledge and skills, on the technology available to them, and on the bountifulness of the natural environment in which they live. These together are called … ‘productive forces’. Marx alleged that the productive forces determine the way people make their living and, at the same time, the way they relate to one another in producing and exchanging the means of life. These production and exchange relationships are what Marx called ‘the relations of production’. The productive forces plus the relations of production, which Marx referred to as ‘the economic structure of society’, shape the ‘superstructure’ of people’s religious, political, and legal systems and their modes of thought and views of life. That is, people’s material lives determine their ideas and their supporting institutions" (Gurley 9).
This implies that “the way people make a living determines their ideas, but these ideas in turn affect the way they make their living” (Gurley 14). Therefore we can assume the following:
"The economic structure of a society molds its superstructure of social, political, and intellectual life, including sentiments, morality, illusions, modes of thought, principles, and views of life. The superstructure contains the ideas and the systems of authority which support the class structure of that society – that is, the dominant position of the ruling class" (Gurley 14).
The superstructure, therefore, “contains not only ideas but also institutions and activities that support the class structure of society- the state, legal institutions, etc…” (Gurley 15). Moreover, Marx asserted, “such development is not imposed on us from the ‘outside’ nor do we simply adapt in passive ways to social change. We, in fact, initiate those changes and, by so doing, make ourselves worthy of the new conditions” (Gurley 12). This implies that that the structure of a state (its governance) cannot change until the economic structure of society necessitates this structural change.
It is, therefore, the coordination of bureaucratic structure with the economic structures of the time that makes any society prosperous and thusly this coordination should be our and every state’s goal.
II. The Many
"The fabric of American empire ought to rest on the solid basis of THE CONSENT OF THE PEOPLE. The streams of national power ought to flow from that pure, original fountain of all legitimate authority." – Alexander Hamilton, Fed. 22
Alexander Hamilton and James Madison designed America to be a democratic republic, featuring filtered (indirect) representation of the people’s authority and built in monitoring provisions called checks and balances used to prevent political degeneration. Moreover, both men talk of an ‘American Empire.’ The terminology is vague and seemingly conflicting and therefore raises questions about the nature and goals of our republic. Most basically, the United States of America is a democratic republic premised on liberal notions of individual liberty and natural rights, whose power is authorized by a covenant of the people. Thomas Paine explains,
It is wholly characteristical of the purport, matter or object for which government ought to be instituted, and on which it is to be employed, Res-Publica, the public affairs, or the public good; or, literally translated, the public thing. It is a word of a good original, referring to what ought to be the character and business of government; and in this sense it is naturally opposed to the word monarchy, which has a base original signification. It means arbitrary power in an individual person; in the exercise of which, himself, and not the res-publica, is the object (Rights of Man 17).
Every government that does not act on the principle of a Republic, or in other words, that does not make the res-publica its whole and sole object, is not a good government. Republican government is no other than government established and conducted for the interest of the public, as well individually as collectively (Rights of Man 17).
Thus, the republic, created by the people, is intended to serve the interests of those people from both a personal and communal perspective. Every American knows, however, that republican government is not that simple. Famously, Madison discussed the problem of factions in Federalist 10, the most basic problem associated with republican governments. He identifies a faction as any “number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community” (Madison Fed 10). By definition, a dominant or ruling faction cannot be republican in nature, so long as the party offends individual liberties or communal interest (an expression of arbitrary power, usually done selfishly). To account for such factions, Madison offers “two methods of removing the causes of faction: the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests” (Madison Fed. 10). In other words, Madison believes that we can only control a faction’s negative effects, and this is best accomplished through checks and balances that monitor representative behavior. Moreover, he writes,
It is essential to such a government, that it be derived from the great body of the society, not from an inconsiderable proportion, or a favored class of it; otherwise a handful of tyrannical nobles, exercising their oppressions by a delegation of their powers, might aspire to the rank of republicans, and claim for their government the honorable title of republic. It is sufficient for such a government, that the persons administering it be appointed, either directly or indirectly, by the people (Madison Fed. 39).
Correspondingly, Madison writes that because the otherwise “accumulation of all powers legislative, executive and judiciary in the same hands…may justly be pronounced the very definition of tyranny” the “legislative, executive and judiciary departments ought to be separate and distinct” (Madison Fed. 47). This implies that a government derived from one particular interest and a tyranny is one in the same; selfish interests are checked by providing those “who administer each department, [with] the necessary constitutional means, and personal motives, to resist encroachments of the others” (Madison Fed. 51). Theoretically, this enables the government first to “control the governed; and in the next place, obliges it to control itself;” this separation of powers is one of the most fundamental checks and balances upon which our Constitution and our liberties are contingent (Madison Fed. 51).
III. The Few
"In times of imminent change, our verbal and sentimental worship of the constitution, with its guarantees of civil liberties of expression, publication and assemblage, readily goes overboard. Often the officials of the law are the worst offenders, acting as agents of some power that rules the economic life of a community.” –John Dewey, Liberalism and Social Action 64
An examination of our constitutional checks and balances indicates that the founders believed that “large governments and relatively small business both faced the same general problem, agency costs;” and furthermore that this dilemma could be overcome by “employing similar techniques” (Wright 70). Namely, they both allowed “stakeholders to elect managers responsible for the day to day operations of the firm or polity, attempted to align the incentives of the managers with those of the stakeholders, and established procedures for monitoring the managers” (Wright 70). Alternatively, these checks and balances can be viewed as defense for personal property, as was typical for liberal discourse of the time. Indeed Locke’s belief that individuals “create government in order to reduce such property losses,” (Wright 70) seems concordant with the founders understanding of property, as is shown in Federalist 10:
The most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination (Madison Fed 10).
In other words, Madison’s fear of majority factions stems from the fact that a majority party (debtors) had the potential to vote for property redistribution at the expense the minority party’s (creditors) property; or as they defined it, individual liberty. Moreover, this also explains the founders infatuation with reducing taxes, as even the most progressive thinkers expressed that lessening “the burthen of public taxes” would allow the nation to enjoy “that abundance, of which it is now deprived” (Paine, Rights of Man 37).
Nevertheless, Hamilton realized that “money is with propriety considered as the vital principle of the body politic; as that which sustains its life and motion and enables it to perform its most essential functions” (Hamilton Fed. 30). To amend for this monetary need, Hamilton argues that the government must have “the power of creating new funds” as this “would enable the national government to borrow, as far as its necessities might require” without crippling the population with taxes (Hamilton Fed. 30). In Hamilton’s view, the power of creating new funds while keeping taxes low was best achieved by enlarging the nation’s “prosperity of commerce,” which, he argued was “the most productive source of national wealth” and therefore should be the “primary object of [our] political cares” (Hamilton Fed. 12). This language enables us to depart from the liberal rhetoric and approach the constitution from an economic standpoint, thereby allowing us to better understand the discourse and intentions of the authors for our current problems.
“From the perspective of 17th century constitutional thinker John Locke, there is no essential difference between political corporations and business corporations” (Wright 68). “Both ‘political’ and ‘business’ governments, therefore, serve the interest of the individual” (Wright 68). In other words, the founders saw government as an organization to promote the interests of its constituents, similar to the way that a business promotes the interests of its investors. Thus,
“The the framers saw governments officials as agents, [who] if left unmonitored, will not always act in the interest of their principals, the nation’s citizens”…“The federal form of U.S. governance itself was [intended to be] an effective means of reducing the principal-agent problem because the local, state, and national governments monitored each other closely” (Wright 59, 60).
From a strictly business understanding, these were problems of organizational inefficiency; accordingly, these issues are most often a byproduct of asymmetric information. Asymmetric information is manifested in two ways—adverse selection or moral hazard, and “if unchecked, both lead to inefficient outcomes” (Wright 61). Adverse selection “occurs whenever lenders or buyers cannot readily differentiate between good and bad products or risks” thus resulting in “naïve buyers…buying overpriced” goods. This can be a “major problem in insurance and lending markets” because as risky borrowers demand more coverage, interest rates are driven up, and “safer borrowers stop competing entirely” effectively destabilizing the market (Wright 61). Moral Hazard occurs when “sellers, borrowers, or insured firms…engage in activities that reduce the likelihood that they will be able to comply with their contracts” (Wright 61). The principle-agent problem, the problem which most concerned the founders, is a type of moral hazard that occurs when “the interests of owners (principals) and employees (agents)…diverge, giving employees incentives…to behave in ways not in the interests of the owners” (Wright 62). Accordingly businesses and politicians alike determined that, “the key to reducing information asymmetry [was] to create information about counterparties” which could “discern risky from safe potential counterparties” (Wright 62). Thus,
The more commercially oriented patriots, therefore, sought to develop constitutions that would reduce the principal- agent problem in government without rendering the government feeble. They did so by creating effective monitoring procedures and incentive structures analogous to those used in business. Referred to as ‘checks’ and ‘balances’ in the political science literature, monitoring provisions included the federal form of U.S. governance, the tripartite form of the state a national governments, bicameral legislatures, and sundry less well-known stipulations…(Wright 85).
This “recognition of the need to create mechanisms to reduce agency problems” in the bureaucracy is manifested as checks and balances in our covenant (Wright 66). These agent monitoring provisions ensure that leaders do not “breech the contract between government (agents) and the people (principles)” by “inducing leaders to act on behalf of the nation’s owners, the citizenry, and not in their own self interests” (Wright 71).
Many of the founders saw commercial growth as the best means to fund a republic based on individual liberty, we can now examine the ways in which they instituted belief. Wright writes that:
The link between finance and growth is relatively simple. Growth inducing financial systems create ways to store wealth reliably over long periods. When combined with the property assurance supplied by a stable, nonpredatory government, financial systems provide individuals with incentives to create wealth. How individuals then go about creating private property barely matters. Allow them to keep the fruits of their labor and people will invent, invest, and innovate their way to prosperity (124).
Fittingly, after the ratification of the constitution:
The United States underwent a rapid financial revolution…The new federal government established the dollar as the national unit of account, greatly improved its credit, and initiated a central banking system that disciplined a thriving commercial financial-services sector that included banks, brokers, and insurers (97).
So we see that the establishment of properly aligned institutions is hugely important on a number of levels. In this example we see that “the development of government debt markets and financial intermediaries reduced information asymmetry, people invested their hoards in a variety of productive enterprises” (Wright 93). Moreover, this increase in the money supply “lowered commercial interest rates,” and taught us that financial efficiency was depended on “adequate liquidity” (Wright 104). This liquidity was provided by the financial intermediaries and the effect of these transfers was “to get money, in a timely fashion, to where it would do the most good for the lowest cost possible” thus allowing early “entrepreneurs to acquire the loans that they needed in order to make their business more efficient” (Wright 104). The results of this experiment were better than expected, Wright describes them:
The stable political environment that emerged out of the constitutional era spurred development of a financial sector that induced economic growth. That higher level of growth, in turn, made the U.S. political scene yet more stable, inducing further financial innovations and still more growth. The early United States, in other words, entered an autocatalytic or positive feedback cycle, the exact opposite of which plagues many developing countries to this day (91).
What is important is that the founders recognized that governments and businesses faced the same general problem, agency costs, which were overcome by “employing similar techniques;” unprecedented rates of growth were the results. This shows that even our founding fathers had to earn their new conditions, and did so by structuring American bureaucracy such that it theoretically corresponded to the prevailing macroeconomic discourse of the time. Moreover, this alignment made possible the coming of the industrial revolution and guaranteed the maintenance of the established superstructure, most notably the dominant class hierarchy.
Madison wrote that “different interests necessarily exist in different classes of citizens. If a majority [(irrational debtors)] be united by a common interest, the rights of the minority [(creditors and merchants)] will be insecure;” once this occurs “anarchy can truly be said to reign” (Madison Fed. 51). Therefore, we understand that the Senate served as a monitoring provision designed to protect individual liberty. Our bicameral legislature, composed of the House of Representatives and the Senate, dictates that each congressional body “represented distinct interests (Wright74);” therefore each body necessarily promoted opposing classes as well, at least to Madison. Senators have ‘sufficient permanency’, which renders them less likely to succumb to the desires of the masses (debtors), and more importantly, better able to defend the permanent interests of the community (prosperity, mostly from commerce). Fundamentally this aims to protect the masses “against their own temporary errors and delusions” (Madison Fed. 63). Reciprocally, with its frequent elections and proportional representation, the House ensures that congress is always a manifestation of the population at large. Madison writes that the House’s utility derives from the fact that:
The public affairs of the union are spread throughout a very extensive region, and are extremely diversified by the local affairs connected with them, and can with difficulty be learnt in any other place, than in the central councils, to which a knowledge of them will be brought by the representatives of every part of the empire. (Madison Fed. 53).
Essentially, government can not only control the subjects, but it can also control itself, and this doubles “the security to the people” (Fed. 62). The Federalists checked the potential for abuse by dividing power between different branches and then giving each branch “opposite and rival interests.” Interestingly, Hamilton argues that a lack of proportional representation in the Senate is optimal because “the idea of an actual representation of all classes of the people by persons of each class is altogether visionary” (Hamilton Fed. 35). He argues that in a society whose ‘primary object’ is the expansion of commerce:
Mechanics and manufacturers will always be inclined with few exceptions to give their votes to merchants in preference to persons of their own professions or trades…They know that the merchant is their natural patron and friend; and they are aware that however great the confidence they may justly feel in their own good sense, their interests can be more effectually promoted by the merchant than by themselves (Hamilton Fed. 35).
To demonstrate, consider that John Jay “designed the state senate [of New York] to defend the interests of the wealthy landowners and to ‘balance’ the power of the governor with the democracy of the assembly” (Wright 83). This prevented power from falling into the hands of a single class and aligned the interests of the agents with that of their principals by pitting aristocratic (people who know how to make money) and the public (people who don’t know how to make money) interest against each other.
Furthermore, the original constitution inferred that “the House represented the interests of the people at large of each state, whereas the Senate represented the interests of the several state governments” (states needed profit so that they could avoid excess taxation) (Wright 84). This understanding of a Senator’s job and qualities was concurrent with the political discourse of the beginning of the 20th century, as shown in General Pinckney’s statement that the Senate exists to “represent the wealth of the country” (Qtd in Garrison 227).
Contemporaneously, George Mason confirmed that an “important object in constituting the Senate was to secure the rights of property” (Qtd in Garrison 227). This demonstrates that “the U.S. constitution was the product of business interests that sought to empower the government while simultaneously seeking to reduce agency problems” (Wright 84).
Madison and Jay believe that, “the federal senate will never be able to transform itself…into an independent and aristocratic body,” because it cannot attain full legislative authority unless it first “corrupts itself, then the state legislatures, then the House of Representatives, and then the people at large” (Madison Fed. 63). However, Madison says that if such tyranny were to happen it would be a product of “causes which the foresight of man cannot guard against” (63) and accordingly, “would, like all other fraudulent contracts, be null and void” (Jay 64).
We see that the founders created the Senate to “represent the wealth of the country;”(Garrison 227) and that in order to function properly, representatives had to be elected by state legislatures, and comprised of enlightened and virtuous merchants who could best promote the interests of their constituency; which was, the expansion of commercial profit as a means to boost revenue and lessen tax burdens in each state. At the time this was the correct structure for congress, and the U.S. experienced significant economic growth in the ensuing years. By the turn of the century however, the Senate was conceived to be the “most corrupting element” in American bureaucracy (Garrison 227). Garrison noted that because “every vote in the Senate is so important to the great parties…they are forced to struggle for ascendency in each of the state legislatures by whom the Senators are elected” (228). The connection between the state congresses and the Senate forced each state’s to “turn upon the national complexion of the legislature” and thus provided the “managing spirits of the great parties” with unconstitutional and dangerous “arbitrary control” over local governments (Garrison 228).
In other words, the changing relationship between the productive forces and the relations of production created conditions that helped to reduce the integrity of the Senate and public trust. These changes to our superstructure rendered the inherent link between Senate and the state governments (agency structure) obsolete, and soon thereafter the “love of power” became the “real motive for existence” for Senators (Garrison 228). That is to say, commercial progress occurring outside of the Senate created a number of agency inefficiencies within Senate. Most specifically, the ‘merchant class’ and their interests became divided into two factions; the capitalist class, the businessmen and the entrepreneurs who could generate the most profit, and the bankers, the financers upon which the capitalist class depended. The capitalists provided catalyzing innovation and highly profitable investment opportunities which soon came to symbolize the wealth of our nation; however these men also possessed a potentially corrupting effect, in the sense that there were no provisions to check their despotic appetites. This meant that when a state legislator voted for a senator there were problems of adverse selection and moral hazard because the private sector had no means for providing counterparty information, and consequentially allowed principal-agent problems to arise more frequently. Additionally, the dissemination of party politics into the state level created a cycle of arbitrary power for the new aristocratic class, whose personal monetary interests were now being debated at a local level; this meant that distinct bodies were defending the same interests and classes and that power was in a few hands. As defined by Madison this is tyranny; thusly the contract was re-written.
From this discourse it is apparent that the convergence of three interdependent forces at the turn of the century; the new forces of production, (industry), the new superstructure which accompanied it (economic agency relations), and the new bureaucratic agency relations required by them (as with any change in superstructure); all worked facilitate the demise of Senatorial trust. This made the arbitrary usurpation of state rights and individual liberties by a single class possible. Today we see explicit evidence that our society is undergoing similar changes; instead of industrialization we are experiencing globalization, which has ushered in a new worldwide superstructure, and which, predictably demands new bureaucratic agency guidelines. However, we cannot solve today’s problems until we have a fundamental understanding of laws of 1913. The 17th amendment changed the constituency of Senators from state legislators to the general public; simultaneously, the Federal Reserve Act of 1913 created our current bank and defined its objectives of U.S. monetary policy. Therefore, we see that the ability to manipulate the economy was divided between two separate bodies, the congress – to control fiscal policy (for capitalists), and the Federal Reserve (the Fed) – to acts as our central bank and decide monetary policy (for bankers).
IV. The Appointed Few and the Elected Few
“But they had no glimpse of the fact that private control of the new forces of production, forces which affect the life of every one, would operate in the same way as private unchecked control of political power.” -John Dewey, Liberalism and Social Action 36
There is ample historical evidence to prove that we can re-align our institutions with economic conditions as the necessity presents itself; and that we have done so in ways that secured commercial prosperity and our permanent aggregate interests. The Senate, now elected by the people of each state, still represents national wealth, but is composed by a different class (capitalists) who are more able to generate communal wealth (through private investment). Knowing, however, that financial intermediaries play an invaluable role in reducing asymmetrical information and money lending (conditions without which capitalist cannot be profitable), the Fed was created and composed of non-partisan bankers (creditors), independent of public opinion, so that they could create the necessary conditions for private investment to prosper (basically, they promote the interest of the ‘market’).
This created effective monitoring structures because power was divided between two bodies composed of different classes and different interests. During the 20th century this was a very effective structure because the increased investment procured by a well run central bank, along with tax laws that defended firms and their shareholders in the name of capital investment, allowed firms to innovate, create new technology, and begin the impending globalization of our planet.
But now the world is changing. The implications of a globalizing economy are massive, in large part due to the fact that commercial expansion in a globalized world requires vitally different corporate agency relations than during colonial, mercantile, or industrial times. To account for these problems we must study the global economy.
Former Federal Reserve chairman Alan Greenspan (banker, appointed few) said that “individual economies grow and prosper as their inhabitants learn to specialize and engage in the division of labor” and therefore “Globalization – the deepening of specialization and the expansion of the division of labor beyond national boarders – is patently key to understanding our recent economic history” (364). Ultimately, he views globalization as a progress because it “not only reduces costs and price inflation” but also results in a worldwide increase in standard of living (364). However, he notes that, “wages and prices are being suppressed by a massive shift of low-cost labor” in emerging nations such as China (479). He says that “the continuing acceleration of the flow of works to competitive markets…has been a potent disinflationary force” and as such are subduing prices and interest rates worldwide (Greenspan 479). Accordingly, the former Fed chairman predicts that “without a change of policy, a higher rate of inflation can be anticipated” and to compensate “the Fed…would have to constrain monetary expansion so drastically that it could temporarily drive up interest rates into the double-digit range” (Greenspan 483). Higher interest rates hurt the republic because individual wealth decrease and people seeking loans get crowed out, hindering potential innovation that is so beneficial to the community. Furthermore, this undermines the Fed’s overall goal of price stability.
Therefore, Greenspan contends that some of our problems come from the increased supply of low-cost of labor in countries like China. To illustrate this process let’s examine America’s largest importing firm, Wal-Mart. According to a PBS report, Wal-Mart’s unbelievable success can be attributed to the fact that they figured out how “to exploit two powerful forces that converged in the 1990’s – the rise of information technology and the explosion of the global economy” (PBS.org). As a result, “retailers are now more powerful than manufacturers” in large part due to the fact that “at a salary of only 50 cents an hour…Chinese labor is an unbeatable bargain for international business” (PBS.org). Sadly however, “the dynamics that create lower prices at Wal-Mart and other places are also undercutting the ability of many, many workers to earn decent wages and benefits and have a stable life" (PBS.org). Greenspan describes this issue as a conundrum. On one hand, free enterprise on a global scale keeps short-term interest rates low and engenders a somewhat leveling style of worldwide development. On the other hand, such progress is directly responsible for U.S. job losses, and long-term interest rate hikes; this contradicts the Fed’s predetermined goals. The benefits of “progress” seem to be muting each other, and in some scenarios actually hurting the U.S., indicating that somewhere during this process a deadweight loss must be occurring, most probably as a result of inefficient or unchecked agency.
We identify this unchecked agent as the modern day multinational corporation, the driving force behind globalization and our durable source of imports and stock market gains. The problem is not that these firms are bad; moreover, our problems lie in the nature of ownership and shareholding. Greenspan explains that “throughout the 19th and 20th centuries, shareholders…actively participated in governing” the corporations in which they invested (Greenspan 424). This acted as a monitoring provision and prevented principal agent problems from developing. However, “as financial institutions evolved over the 20th century, shareholding became a matter of investment, not active ownership” and thus corporate governance, which was formerly manifested as “democratic corporate governance” has “morphed into a type of authoritarianism” (Greenspan 424). We can partially attribute this to the fact that “in global markets, the difference between a right move and an almost right move might represent hundreds of millions of dollars, whereas a generation ago, when the playing field was much smaller, the difference would have been in the tens of millions” (Greenspan 426). This leads him to conclude that, “given the shareholder-management divide, the autocratic-CEO paradigm appears to be the only arrangement that allows for the effective functioning of a corporation. We cannot get around the authoritarian imperative of today’s corporate structure” (Greenspan 436). Furthermore, Greenspan writes that “it should not come as a surprise that, as with authoritarianism everywhere, the lack of adequate accountability in corporate management has spawned abuse” (Greenspan 425).
This describes a major change in economic agency relations; the unchecked power of the new CEO creates problems of both adverse selection and the moral hazard for investors and public representatives alike. Ergo, we argue that the Fed’s efforts to stabilize prices, maximize employment, and increase per capita GDP, are undermined by the firms empowered by the Senate’s neo-liberal, anti-regulatory policies. We believe that the Senate should complement the central bank by levying taxes and subsidizing outlays, in a way that allows both individuals and the community at large to reap the benefits of republican life; currently, however, this is not the situation that prevails. The simplest explanation for this is that as the scale of our collective economic climate grew, firms increasingly needed the unwavering leadership of a single individual; thus as Senators promote the ‘prosperity of commerce,’ they are merely empowering unchecked authoritarian CEOs. Such capitalists operate, by and large, without any form of counterparty monitoring and subsequently are free to exploit the fair conditions established by the central bank at the expense of U.S. citizens (see Wal-Mart). Moreover, nothing is in place to prevent a leader from using such power for bribery, exploitation, or otherwise corrupt activities. Therefore we observe that a great portion of our authority is derived from an “inconsiderable portion or a favored class” of society, who have merely appeared to uphold republican values while engaging in selfish ambition (Madison Fed. 39). We recognize that Madison understands this as tyranny.
V. The One
"Energy in the executive is a leading character in the definition of good government. It is essential to the protection of the community against foreign attacks; it is not less essential to the steady administration of the laws; to the protection of property against those irregular and high-handed combinations which sometimes interrupt the ordinary course of justice; to the security of liberty against the enterprises and assaults of ambition, of faction, and of anarchy." – Alexander Hamilton, Fed. 70
To summarize everything more simply, new economic conditions have broken down older agency monitoring techniques; this has opened the door for self aggrandizing, monarchical, and otherwise offensive behavior at both a corporate and public level. This demonstrates an idea once expressed by John Dewey, that “private control of the new forces of production, forces which affect the life of every one, would operate in the same way as private unchecked control of political power” (Dewey 36). If we were to compare today’s conditions to those leading up to the first Senate reform we would find obvious similarities, as new economic forces have created new superstructures, which demand new agency structures. Accordingly, we see similar corruption in today’s senatorial body, including the aggrandizement of parties, the growth of machine rule, the purchasability of senatorships, and the loss of competence, honesty, and patriotism in our representatives. We recognize that a corrupt Senate is inadequate to fulfill the duties of republican government because it lacks the public trust which justifies the transfer of the people’s authority. We observe that self-aggrandizing behavior based on arbitrary power has become the norm in the Senate, and that this will persist until our bureaucratic rules are redefined such that they more compatible with our current economic system.
Recall that the founders believed that “large governments and relatively small business both faced the same general problem, agency costs;” and furthermore, that this dilemma could be overcome by “employing similar techniques” (Wright 70). Moreover, this is indicative of their belief that “there is no essential difference between political corporations and business corporations” (Wright 68). This implies that to fix bureaucratic inefficiencies, which lend so easily to representational corruption, we must provide for monitoring and counterparty information mechanism similar to those proven effective within our economic framework. In so far as Greenspan’s insight has provided, it seems that the only working model for corporate governance on a global scale is of dictatorial nature. Perhaps a global economy is too large of an arena for a representative body to manage effectively; our most successful businesses seem to think this.
Realistically, I believe that there are three possible outcomes to our current situation, all of which are directly related to how we respond to these issues. If we do nothing, our congress will become increasingly corruptible and arbitrary rule masked as republicanism will selfishly prevail until the oligarchy is violently removed. This is the least probable outcome, for Americans are innovative and weary of monarchies.
The second possibility is that the private sector will develop new and improved organizational techniques and monitoring structures that severely reduce the potential for untrustworthy behavior by representatives. If reliable procedures are indeed developed, then the Senate or congress could be reformed to reflect the new, efficient mechanisms proven to work in our highly competitive markets. This is problematic, however, because such a solution must be considered temporary, as economic forces and corresponding models are always subject to change. Nevertheless, the fact that Madison believed in “legislative supremacy” (enforced by the Senate’s sufficient permanency) and that our current system has powerful economic incentives to encourage such innovation makes this a real possibility (Madison 51). Furthermore, this is type of change that would be supported by the today’s dominant class, as it most resembles the hierarchies that elevate them in the current superstructure.
The third option is that effective fiscal policy, as now conducted by the Senate, is deemed permanently inefficient because the massive scale of our global economy leaves little room for error, indecision, or argument. If Greenspan is correct, and this is proves to be the case, then perhaps the Senate’s tenure is nearing an end. The Senate’s destruction would be accompanied by increasing executive authority, as the President would probably assume most Senatorial powers; this, however, would require additional checking mechanisms on executive representatives to maintain integrity and public faith; otherwise arbitrary rule could easily develop. These necessary checking mechanisms could resemble the development of a bicameral executive branch, elections for other executive positions currently filled by appointment, or any number of the inexhaustible possibilities.
Dewey, John. Liberalism and Social Action. New York: G. P. Putnam's Sons, 1935. Print.
"Frontline: Is Wal-mart Good for America?: Watch the Full Program Online." PBS. Web. 30 Apr. 2010. <http://www.pbs.org/wgbh/pages/frontline/shows/walmart/view/>.
Garrison, Wendell. "The Reform of the Senate." Atlantic Monthly (1891). Harvard Law School Library. Web.
Greenspan, Alan. The Age of Turbulence. New York: Penguin, 2007. Print.
Gurley, John. "The Triumph of Capitalism." Challengers to Capitalism. New York: WW Norton & Company, 1979. Print.
Hamilton, Alexander, John Jay, and James Madison. The Federalist. Bantam Classic, 1787. Print.
Wright, Robert. Hamilton Unbound: Finance and the Creation of the American Republic. Westport, Connecticut: Greenwood, 2002. Print.
Ziobrowski, Alan, Ping Cheng, and James Boyd. "Abnormal Returns from the Common Stock Investments of the U.S. Senate." Journal of Financial and Quantitative Analysis39.4 (2004). School of Business Administration, University of Washington. Web.