Friday, October 28, 2011

The Paradox of Freedom

What is freedom?

Definition: freedom - noun
1. the state of being free or at liberty rather than in confinement or under physical restraint.
2. exemption from external control, interference, regulation, etc.
3. the power to determine action without restraint.
4. political or national independence.
5. personal liberty, as opposed to bondage or slavery.

If one operates without external control, interference, regulation, or restraint, at some point it will impose upon the freedom of another. Imposing on the freedom of another limits the freedom of the other. That contradicts the definition of freedom. However, with a small number of people (or entities) who have little or no interaction with each other, the above definition may still work.

As the number of people and/or level of interaction increases, one quickly reaches a point where the freedom of one imposes on the freedom of another. In order minimize and resolve those conflicts, there must be rules, regulations, restraints, and external controls that limit the actions of the free people. Once again, that contradicts the definition of freedom.

This is the paradox of freedom: You can’t be totally free in the presence of other free people, yet, if there are no other people, your freedom is meaningless. Freedom in a society must have limits.

What are the limits of freedom?

If freedom must have rules, regulations, restraints, and external controls, then where must your freedom end? Let’s look at some examples. It’s against the law to take the possessions, or property of another without permission and/or compensation. It’s also against the law to kill another (except in defense). So, freedom doesn’t mean you’re free to do anything you wish.

The authors of the US Declaration of Indepence recognized this and they stated:
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just Powers from the consent of the governed…”

So, the legitimate purpose of government is to secure and protect your rights and freedom, and to enact and enforce laws that accomplish that purpose. And the power to do so comes from the collective, not individual, consent of the people. Your rights and your freedom are, and must be, limited when they begin to infringe upon the rights and freedom of another, or to infringe or violate the just laws enacted to protect those rights.

We must reexamine the very definition of freedom. Referring to the definition above, items 2 & 3 need modification such as:
2. exemption from external control, interference, regulation, etc., except those necessary to protect the rights and freedoms of everyone.
3. the power to determine action without restraint, except those restraints necessary to protect the rights and freedoms of everyone.
Freedom must have the rule of law. Below are a few quotes that reinforce these points:
“But freedom of men under government is to have a standing rule to live by, common to every one of that society, and made by the legislative power erected in it. A liberty to follow my own will in all things where that rule prescribes not, not to be subject to the inconstant, uncertain, unknown, arbitrary will of another man ...” ~John Locke
“The fact, in short, is that freedom, to be meaningful in an organized society must consist of an amalgam of hierarchy of freedoms and restraints.” ~Samuel Hendel

“Liberty means responsibility. That is why most men dread it.” ~George Bernard Shaw, 1905
Freedom requires constant defense

Support those laws which protect your freedom and your rights. Demand them, honor them, and enforce them. Yet be wary of every proposal for a law that diminishes the rights or freedoms of any person, as your freedom diminishes with it. You must constantly defend freedom, or it will be constantly eroded. To reinforce this point, I'll leave you with a few final quotes, as caution about the nature of government, law, and freedom:

“Men fight for freedom, then they begin to accumulate laws to take it away from themselves.” ~Author Unknown
“They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.” ~Benjamin Franklin, 1759
“No man can put a chain about the ankle of his fellow man without at last finding the other end fastened about his own neck.” ~Frederick Douglass, 1883
“I believe there are more instances of the abridgment of the freedom of the people by gradual and silent encroachments of those in power than by violent and sudden usurpations.” ~James Madison, 1788
“Many politicians are in the habit of laying it down as a self-evident proposition that no people ought to be free till they are fit to use their freedom. The maxim is worthy of the fool in the old story who resolved not to go into the water till he had learned to swim.” ~Thomas Macaulay
“Liberty has never come from the government. Liberty has always come from the subjects of it. The history of liberty is a history of resistance.” ~Woodrow Wilson
“I prefer liberty with danger to peace with slavery.” ~Author Unknown
“He that would make his own liberty secure, must guard even his enemy from opposition; for if he violates this duty he establishes a precedent that will reach himself.” ~Thomas Paine
“Freedom has its life in the hearts, the actions, the spirit of men and so it must be daily earned and refreshed - else like a flower cut from its life-giving roots, it will wither and die.“ ~Dwight D. Eisenhower

Wondering what Occupy Wall Street is about?

Here is some background for anyone who may be wondering what OWS is all about:

Who lobbied Congress to repeal the Glass-Steagall Act, thus allowing banks and financial institutions to merge? Wall Street

Who created the "derivatives" that made the real estate crash a huge problem for Wall Street? Wall Street

Who invested in all those 95%-100% sub-prime mortgages? Wall Street.

Who created and participated in all the reinsurance deals that caused the failure of AIG? Wall Street.

Who got a $700B bailout loan from the taxpayers? Wall Street

What is the first thing Wall Street did with their bailout loans? Paid hundreds of millions of dollars in bonuses to the very people responsible for the above. If you borrowed money from WS to bail out your failing business and proceeded to pay out huge bonuses to your executives and managers, they would probably call the loan. Yet they defended it when they did exactly that.

How many WS execs have been charged (in a civil or criminal suit) for any of the above? Few, if any.

They've lied, cheated, changed the rules, and manipulated the system, while the majority of the country (and much of the world) has paid the price. Yet they have not been held accountable for any of it.

We the People are pissed off about being pissed on!

These are not the only issues driving the Occupy movement, but they're some of the major ones behind OWS specifically. Here are some of my posts on related issues of "corporatism":
Corporations Are Not People
The Paradox of Free Markets.

A NY Times op-ed piece about some of the deals.

And a Washington Post blog about the growing income disparity of the top 1% in the US and other countries.

An Interview with Jeff Greene, a billionaire who has begun to see the nature of the problem.

Wednesday, October 12, 2011

The Paradox of Free Markets.

There has been a lot of discussion the last few years about deregulation and allowing "the free market" to operate. In many/most cases, that is the most effective solution. Allow buyers to "vote with their dollars" by supporting the sellers who offer the most suitable (including price, quality, performance, etc) product for the buyer's needs. That is fundamental to capitalism as an economic model.

However, "free markets" do not work when any of the following are true:

  • One company controls 45%+ of the marketplace, or a few companies control over 75% of the market.
  • There are high barriers to entry for new competitors (including regulatory or capital cost barriers).
  • There is a limited supply or distribution chain. This includes "natural monopolies" such as utilities, cellular providers (since RF bandwidth is a limited resource), etc.
  • Corporations/companies get special interest exceptions or special benefits (e.g. tax abatements) from the government.
  • Regulations to prevent collusion by sellers are absent or ineffective.
  • The "buyer" has a medical emergency or urgent medical/health need and therefore has no real opportunity to compare providers of medical services. Healthcare delivery is rarely a free market because the of the limited opportunity to research and compare providers, services, and prices.
Note that markets must be considered on a local, regional, and national level. Other levels such as state/province may also be useful measures.

Any of those situations shift the balance of power in favor of the seller, such that free markets don't work. In any of those situations, competition is limited and the buyer has very little power or choice, therefore, it is no longer a free market. When any of the above conditions (and perhaps there are a few I've missed) occur, progressively stronger anti-trust/anti-monopoly regulations should begin to apply as needed to balance the market. If the above situations are not properly regulated and limited, greed and power will always eventually lead to corruption and abuse, it's human nature.

"With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly."
- Ben Bernanke, November 15, 2005, less than 2 months before he became Chairman of the Federal Reserve. Approximately 2.5 years before the banking crisis that was as extensive as it was in large part because of trading said derivatives.

The restraint must be preemptive. Because corruption and abuse cause damage that is difficult (frequently impossible) to repair, and because history shows that they are inevitable, regulatory limits should kick in automatically as soon as one of those conditions exists, even if there is no actual evidence of corruption, collusion, anti-competitive activity, or abuse. I know some people will disagree with that statement, calling it a prior restraint of trade, etc. However, history has demonstrated many times that no matter how benevolent the intent, eventually it will become corrupt because power and money draw people who will abuse and corrupt the organization. By the time the corruption or abuse is clearly demonstrated, the damage is likely to be irreversible, extremely costly, and difficult to restrain.

"I made a mistake in presuming that the self-interest of organisations, specifically banks, is such that they were best capable of protecting shareholders and equity in the firms ...."
- Alan Greenspan, Chairman of the Federal Reserve when the Glass-Steagall Act was repealed in 1999 and he supported it's repeal, testifying to Congress on the banking crisis in Oct 2008.

Unregulated free markets don't work when any organization has sufficient power to manipulate the market. Corporations can not be relied upon to act in the best interest of their shareholders, much less the best interest of the market or the people. The history of anti-trust violations makes that abundantly clear. The repeated banking failures make that abundantly clear. The US auto industry in the 50's-60's (unsafe vehicles) makes that abundantly clear. There have been thousands of anti-trust suits filed by the US Government against companies alleged to have engaged in anti-competitive practices, manipulating a market, etc. Anti-competitive behavior is not a rare occurrence.

Even renowned economist and free market advocate Milton Friedman, acknowledged that monopolies arise in free markets, and that at least one of them has persisted (for over 130 years):
“A monopoly can seldom be established within a country without overt and covert government assistance…The De Beers diamond monopoly is the only one we know of that appears to have succeeded. We know of no other that has been able to exist for long without the direct assistance of governments.” -- from "Free to Choose".

Note that he acknowledges others have existed, but didn't last "for long". He doesn't say what the others were, or how long they lasted. Did they last 10 years? 20? 50?. How long does a monopoly have to exist before it causes harm to consumers or the market? While he dismisses them as not lasting for long, he never addresses whether the monopoly was harmful while it existed.

Now we have the paradox:
A free market is the most effective, most responsive, and least costly method of creating competition and allowing the market to respond to consumer wants and needs. Yet a free market can't be truly free, it must be guided toward balance via regulations that take effect when any of the above conditions exist.

The solution is not more laws and regulations. That's the solution proposed by many people whenever there is another problem, however, that usually makes matters worse. A better solution is to start by replacing almost all existing regulations with fewer, simpler regulations that have less overlap, less duplication, and very few exceptions. The regulations should be as few and as simple as necessary to prevent most abuse, corruption, collusion, fraud, and deliberate or negligent harm to buyers and to keep the market from becoming significantly unbalanced. As new situations arise that aren't addressed adequately by the laws and regulations, reevaluate and update or replace existing regulations. When I say update, I literally mean update the existing regulation, don't just add another new law or an addendum to the law, add, update, or remove sections to that the changes are incorporated naturally into the text of the law.

Keep it as simple and straightforward as possible. Complexity will make the laws and regulations ineffective and costly. The market should be allowed to operate as a free market so long as conditions allow for a balanced free market, with just basic regulations regarding fraud, liability, negligence, etc. Regulations to prevent abuse when the above conditions exist should be as few and as simple as necessary to allow a balanced market. The regulations should also be progressive, with minor restrictions when the threshold is crossed, and stronger restrictions if the market continues to be unbalanced (e.g. one or a few suppliers continue to gain control of a larger percentage of the market). The goal is to "nudge" the market into balance, not to manage the market. Markets are far too complex and dynamic to be managed, regulations must merely restrain abuse and promote a balanced free market, they must not attempt to manage the market or steer it in a specific direction.

Special interest exceptions or exclusions should almost never be included in a law or regulation, even temporarily. There will be some legitimate exceptions. Some exceptions might be permanent, and those should be part of the law. Temporary exceptions should be via an addendum that automatically expires and cannot be extended. "Temporary" laws must be kept temporary. Writing a new law that has the effect of extending a temporary law must require a "super-majority" vote for it to be enacted.

Laws and regulations should be simple enough for the majority of people with at least an 8th grade education to understand what the law says. Lawyers and judges can debate the details, limits, and exceptions when necessary as that's a legitimate purpose of the courts, but the legislation and regulations should be understandable to most adults. For instance, we don't need separate laws for computer fraud, insurance fraud, credit card fraud, securities fraud, etc, we just need one law that makes fraud illegal, and establishes penalties based upon the extent, value, and impact of the fraud. Fraud is fraud, how you commit it should be irrelevant. A similar approach applies to other crimes.

I stumbled across a document that covers this in some detail. It's longer than my post, but worth reading. Here's one relevant excerpt:
All economic systems are governed by certain rules of game, and the governing rule for a modern market economy is the rule of law. The rule of law has two economic functions. First, the rule of law regulates and limits discretionary interventions of the state in economic activities. Secondly, the rule of law regulates the economic behavior of individuals and enterprises to create an orderly, stable environment with fair competition, clearly defined and well protected property rights, and effectively enforced contracts. In essence, these two economic functions of the rule of law are about regulating the relationship between the state and the market through legal institutions so that economic development is both possible and sustainable.

According to a NYTimes article, Sanford Weill, former CEO of Citigroup, the man considered to be one of the most influential in the repeal of Glass-Steagall, and one of the people who profited most from it when Citigroup was created, now says:
“What we should probably do is go and split up investment banking from banking. Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”
Many of his counterparts at other banks have agreed:
"In 2009, John S. Reed, who with Mr. Weill forged the megamerger that created Citigroup, apologized for creating a lumbering giant that needed multibillion-dollar bailouts from the government. Philip Purcell, the former chief executive of Morgan Stanley and David H. Komansky, the onetime leader of Merrill Lynch, two other main figures in the fight to repeal Glass-Steagall, have echoed similar concerns about deregulation." - NYTimes

Related links: Updates:
2011-10-27. Updated with quotes from Bernanke and Greenspan, added examples where free markets have failed, and expanded the section on keeping the regulations simple.
2011-10-28. Changed the title from "What is a Free Market?".

Corporations are not people

Let me start with, I am not a lawyer, and this is not legal advice. This is my opinion about why corporations should not be considered a person.

What is a corporation? A corporation is an artificial legal entity created for the purpose of operating an ongoing business (for profit, or non-profit) or governmental unit (city, town, etc). They serve several practical business functions, and that is their only reason for existence. Corporations exist to allow a business to:
  • survive the death of any individual
  • be bought and sold via the issuance, sale, and purchase of stock
  • offer limited (to amount of the investment) liability for the stockholders
  • offer limited liability to employees, officers, and directors, except when they have violated the law or are found to have been negligent
As an artificial entity, they need to be endowed with certain rights by their creator. Who is their creator? Government, as an agent of The People governed. With the exception of the rights necessary to fulfill the purposes above, they should have no rights that a person doesn't have. Indeed, they should have fewer rights than a person.

Corporations should have very limited access to petition the government or lobby for/against laws and regulations. They are not people, the government doesn't represent them. The government is the creator of the corporation, not it's servant. Corporations must have no right to vote, and should not be allowed to contribute to political campaigns, PACs, or otherwise fund a political campaign in ANY fashion. Their right, if any, to lobby politicians should also be severely limited. As one commenter on this post put it:
If corp's can influence legislation then at least one will be unscrupulous enough to influence laws to give themselves an unfair advantage in their market therefore dominating it and becoming a duly ordained part of a growing oligarchy.
The individual owners, officers, directors, and even employees can personally contribute to and support politicians, but the corporation should not be able to do so, nor be allowed to direct them to do so, compensate them for doing so, nor penalize them for not doing so. Corporations as entities of business should have little or no involvement in the political process. The government is charged with serving and protecting "the People", and a corporation is not a person.

Corporations must have access to and protection under the legal system. Corporations must have the right to sue and be sued, and be subject to civil and criminal penalties. However, in criminal proceedings, only the officers, directors, or employees can be charged. There is no "body" (corpus) to the corporation to charge or imprison. This alone is ample evidence that a corporation is not a person.

The officers, directors, and other employees must be accountable for criminal charges and civil or criminal penalties when their actions as an officer, director, or employee of the corporation would expose an individual to the same charges or penalties. A corporation must not protect a person against being responsible for their actions, and a corporation may be required to share the financial liability for the actions of it's officers, directors, and employees. "I was just doing my job" or "just following orders" does not shield a person from any criminal liability for their actions. It may shield an employee from personal financial liability if they were acting as an agent of the corporation, in which case the corporation is at least jointly, and may be exclusively liable for financial damages and penalties.

While a corporation in civil legal proceedings is treated very similar to a person, a corporation is clearly not a person in a criminal proceeding. In the political arena, a corporation is very different from a person. Corporations don't have the rights of a person, they have only the rights granted to them by their creators. Corporations are created by the government, which are agents of the governed people. Therefore, the rights of a corporation come directly from the government, and indirectly from the people whom those governments serve. For the reasons stated above, those rights must be different than the rights of a person.

Any interpretation of a corporation as a person is seriously flawed and eventually leads to the government being a servant of corporations, and that always leads to disaster.

Edit: 2011-10-21. Clarified the section on civil and criminal liability under the legal system.

Update: 2011-11-08. I just read an article that pointed out some of the concerns raised in the "Citizens United v FEC" case.
"... Its constitutional theory would permit Congress to ban a book as well as a 30-second TV spot if the book satisfied the operative definition of an ‘electioneering communication' and the book's corporate publisher paid for the book with general treasury funds (as it almost certainly would) ... The breadth of that concession is staggering," reads the brief, especially since it's common for such books to come out during campaign season.
The brief continued: "The fact that such books could be banned under the government's theory unless funded by a PAC vividly illustrates why those criteria (to protect speech) are insufficient to safeguard the important First Amendment interests at stake."
Limiting a corporations ability to publish and sell books of a political nature is certainly not the intent nor is it in the best interests of anyone to limit that ability. The rules need to be constructed in a way that allows them to publish and sell such books (or movies, magazines, etc), but doesn't allow them to use that as a means of contributing to campaigns or lobbying the government. For example, giving the books away (or selling them below cost) in support or a campaign, party, or candidate might be prohibited as an illegal contribution by a corporation. Offering a candidate a book/movie deal or job during a campaign or while in office might be prohibited as lobbying or an illegal contribution, or even bribery if the circumstances justified such a charge. This area of allowing commercial political speech is deserving of more attention, but it doesn't alter my position that corporate access to government must be extremely limited and any view of a corporation as a person is seriously flawed.

Update: 2012-06-29
My second article on this topic.

Related Links:
The Story of Citizens United vs F.E.C. video.