Dogma Premise # 14

 Abuse of private power is self-correcting, because markets will punish unpopular behavior.

Dogma #14 anticipates a common objection to Dogma Premise #13, and posits that the force of competition will ensure that nothing bad happens, or at least not for long.

The theory that abuse of private power will be punished by markets defies not only logic and common sense, but also experience.

From an empirical standpoint, it simply must not be true, because abuse of private power is rampant and ongoing in our economy, from wasteful government contracts, earmarks for cronies, and massive fraud in industry after industry (e.g., BCCI, Barings, Enron, WorldCom, Parmalot, Sub-prime Mortgages, Lehman Brothers, Banco Espirito, etc.).  The presence of so many high profile cases suggests an even larger number of smaller incidents that don’t make headlines or are never discovered.  If anything punishes these misbehaviors, it is law enforcement, not the market.  Market forces are not preventing abuse of private power, nor have the ever -- not at the time of civil war profiteering in the 19th century, or Holland’s tulip bubble in the 18th century.

Common sense also suggests that the market will not punish misbehavior.  Punishment is retrospective, based on past behavior.  But market transactions are prospective -- perhaps you used to be a crook, but as a potential customer my question is whether you are one now.  Corporations, in particular, are experienced at pleading innocent to this charge -- if the owners get in trouble, they can always bring in new management and claim to have reformed.  It is unrealistic to ask market participants to police misbehavior simply with their buying and selling decisions, and also misunderstands what is an effective deterrent for an organization as opposed to an individual.

In fact, the market by definition cannot effectively prevent misbehavior.  Suppose for example that unsafe deepwater drilling practices led to a massive oil spill that destroyed a part of the ocean and did a trillion dollars in economic damage to a region.  The idea that future oil drillers will have learned not to make THAT mistake again misses the point that the market did not protect against the mistake in the first place.

The corporate form, which protects shareholders from personal liability, ensures that corporations will constantly have opportunities to engage in profitable-but-risky behavior in which the profits will go to the shareholders, but the risk of harm will be born by others -- possibly by innocent bystanders, like Louisiana gulf coast fishers, or residents of Bhopal, or those injured by landslides resulting from deforestation or mountaintop removal.  The corporate form is designed specifically to foil the kind of accountability assumed by Dogma Premise #14.  And if the theory weren’t clear enough, experience shows across the centuries that markets do not prevent the abuse or private power, and that abuse of private power is not self-correcting, but recurring.

Dogma Premise 15

All Dogma Premises