BY SHADRACK MUYESU
When plunder becomes a way of life for a group of men living together in a society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it – Frederic Bastiat
The philosophy
Thanks to its ability to satisfy man’s primary want, which William Hegel first taught to be the need for recognition, liberal democracy has been widely accepted as the pinnacle of human socio- economic intelligence. In his acclaimed treatise, The End of History and the Last Man, Francis Fukuyama has even labeled it the end of history. But if this recognition extends beyond mere feelings of self-worth and the right to participate in government to economic fulfillment, Liberal Democracy is not a better system of government than those that preceded it. From its definition, one could argue that it never even existed. By separating economy and polity and confining democracy to the latter, what is understood as liberal democracy would better be referred to as a plutocracy.
Liberal Democracy may be defined as a system of government that allows majority rule yet accepts and protects minority opinion. It is anchored on the three pillars of; universal suffrage, the rule of law and free market. The existence of a public participation dictate and a bill of rights that protects among others civil, political and property rights makes ours a liberal democratic government. While civil and political rights guarantee free, fair and regular elections and ensure equality before the law, property rights protect individual assets and investments from state or otherwise expropriation and largely allow a free market economy.
From the outset we can notice a separation: Property rights existing for the benefit of the minority propertied class and civil and political rights existing especially for the rest of society. Depending on the economic philosophy of a country and the control the propertied elite have over the instruments of power, liberal democracy easily degenerates to the class dictatorship of plutocracy. And could this be the end that liberal democracy’s founding fathers in fact hoped for?
As a concept for masters, liberal democracy becomes easier to appreciate when we trace back its origins to the economic and political repressions of the United States. The US Constitution is perhaps the original and most accurate manifestation of liberal democracy.
It was written by primarily a propertied elite, most of them slave owners, who were concerned about the threat a national wave of freedom posed to their wealth and power in the late 18th century. The constitution was the culmination of a physical and ideological endeavor to calm the threat and prevent future unrest. That the founding fathers relegated slave interests to secondary concerns is clear demonstration of their bias for elitism, never mind their stated preference for equality.
To the extent that it kept most happy, liberal democracy was a resounding success.
Relative peace returned to the midlands, the economy soared thanks to a Jefferson inspired agrarian revolution and class differences blurred (on the face of it) with wage increase and a new system of rights. But this peace wouldn’t last long, not with the dawn of the age of industrial capitalism. To protect the top, it was imperative a new intellectualism favoring far right elitist views be created and consistently cultivated. Classical economy was almost immediately replaced by neo classical economics and its pioneers like Henry George and Adam Smith grossly misinterpreted so as to fit into the new order or simply declared de facto mad men. Gradually, liberal democracy became a best practice over society tailored governments and legal positivism took over naturalism.
As mentioned earlier, a plutocracy is a class dictatorship. It preaches socialism for the business elite while confining capitalism to the bottom. In this system, although the elite possess and control a country’s instruments of power- the money supply, the law and the law enforcement agencies- it is the bottom that funds it through taxes. This can be observed from a keen interrogation of the law, the law-making process and the economic as well as the education system of a country. The importance of the law in a plutocracy is to justify the dictatorship. Education is to brainwash the masses into accepting the system as a truth. Law enforcement is to prevent an uprising while the money puppeteers the system. All these while giving the masses an illusion of control.
Classical vs. Neo classical economy
Classical economy is built on a distinction between the factors of production- land, capital and labour. Maximum benefit is only achieved through the maximum exploitation of these factors to give rent, interest and wages respectively. In classical economy, land is regarded as a common heritage of mankind whose rewards, just like oxygen and water, ought to be enjoyed by all. It is therefore important in this system, that land use be taxed. By the mandatory investment of the proceeds of land taxation in a government driven expenditure on public goods like schools, roads and hospitals, even those not in possession of land get to benefit from its use. Because land is God given, and to sustain this system, interests in land are limited to leaseholds- which interest persists only on the condition that it is used optimally and productively. Moreover, to enhance equality and satisfy man’s need for appreciation yet maintain competition of capitalism, classical economy favours taxes on consumption and demands that workers own the industries in which they work.
This philosophy has now been relegated to the archives. In its place is a new neo classical economic model that classifies land as capital and promotes taxation on production. Unlike classical economy, land can be held on freehold, which introduces other toxic interests such as ownership by selling and speculation. Privatization also allows the owners to manipulate the factors of production in their favor. For instance, by owning land and whatever is on it, they make it a scarce resource driving the cost of capital upwards and bringing down wages. Taxes can also be avoided by inflating the cost of production.
Neo classical economy is built on predictability- cause and effect and the idea that factors outside the market influence demand and supply and therefore prices, interests and wages.
This allows the propertied class to maintain the balance in their favor whilst blaming it on outside forces. Take wages for instance. Although interests increase every day with companies making excessive profits, wages have stayed a consistent low because, according to neo classical economy, population increases faster than capital. And this is just not true.
On government, liberal democracy has become the benchmark to the extent that societies are now either adjudged liberal and democratic or authoritarian. Liberal democracy with its capitalism has now become the standard with societies, on their own or at the behest of established free societies, striving towards this system. Even where they acknowledge the inability of certain societies to successfully domesticate liberal democracy principles and the success many countries have achieved pursuing alternative forms of government, its proponents maintain it as a goal these countries must endeavor to achieve. The basis of this argument is as argued by Hegel and Louis Henkin, that guaranteeing human rights must take priority over providing public goods. Fukuyama even argues that while liberal democracy might be slow on development; it is the best guarantor of any development.
Because of this, the art of constitution and government making is now no more than a fishing exercise for good practices. Many years later, the principle of government autochthony- the requirement that governments must conform to the societies they govern and not the other way round- remains an emerging idea.
On legal philosophy, the prominence of rights and secularism, constitutionalism and the rule of law as defined by Baron De Montesquieu has left mankind with a law without morals. This has provided the basis for cut – throat competition and returned us to the Hobbesian anarchy law and government are supposed to have delivered us from. Such a system is only good for one section – the elites, those who own and want to consolidate the means of production.
Unfortunately, Thanks to graduate training and an elite controlled media, the obvious is now obscured, silenced and denied. Denial is reinforced by dominant figures using sophisticated, pedantic logic which students learn to ape in order to distinguish themselves from their peers and advance their careers. Talk about economy and government today is impossible without endorsing their myths.
Perhaps in demonstration
In the United States, arguably the world’s foremost liberal democracy, income for the top 1% has soared over the last 30 years while that of the middle class has remained relatively constant. Specifically, according to CNN Money this group earns an average of $1.3 million a year, which is more than three times as much as they did in the 1980s where they only made $428, 000. The bottom half meanwhile, took home, on average, $16,000 in pre – tax income 1980 – which figure hasn’t changed since. Another research by Pew Research shows most Americans believing that the economic system unfairly favors the wealthy. Ironically, as if to endorse the system, 60% of them believe that anyone people can make it as long as they work hard. It’s the “American dream”.
Consider also the resilience of the largest lenders and the telecoms in the wake of the economic depression. In Kenya, banks continued to make insane profits while the government and citizens fell deeper into debt. And this is especially curious considering the difficulty of securing credit from local lenders. Elsewhere, data shows bank profits remained at a constant relative high throughout the great depression. If anything, it was the other financial institutions such as insurance firms and investment banks that bore the brunt of the collapse, not the banks – the large banks. In fact, bank profits have been shown to remain unaffected by changes in GDP growth. So, just how do banks make their money?
The banks
Like many big corporations, banks thrive on speculation- except that they control the system or at worst, benefit from insider knowledge, which makes theirs anything but it.
In times of tranquility, banks will push money into the system. This will bring down the cost of borrowing hence allowing more people to take up loans. Gradually, they will push interest rates upwards. This in turn pushes the cost of borrowing upwards leaving people struggling to pay back their loans. As more people struggle to pay up, banks will take possession of the real wealth, the land and the assets offered as collateral. Anticipating a market crash due to the high rate of defaulters, established lenders will then insure themselves by dumping the bad loans in trade-offs. Unaware of the looming crisis, the smaller institutions will readily take up these loans viewing them as an opportunity to eat into the big banks. And when the market eventually collapses, it is these big lenders that benefit from a bailout- thanks to the Central Bank and against citizens’ wishes- never mind that they didn’t make any losses. With new money, these large banks will then buy off the competition on the cheap further entrenching their position.
A bank is not the benevolent creature that accepts deposits to issue out as loans with some interest as has been bandied around. A bank is a monster. It siphons real wealth from the economy while giving nothing in return. In doing this, they create money they don’t lend. Consider this.
A fundamental principle of classic economy is the idea that all money ought to be pegged on a certain standard of value. This principle held sway in the years preceding the industrial revolution and the bank renaissance in the England and later the US where all money was pegged to a gold standard. Simply, what was considered as money were paper receipts that banks issued to clients representing the gold they held in their accounts. The large circulation of these receipts resulted in their eventual acceptance as legal tender pushing banks to issue out even more receipts (notes). The notes soon lost their value and the markets plummeted.
To solve this crisis, the English crown moved in to take the money making function away from the private banks and make it a preserve of the Central Bank. The Central Bank would now keep all the gold, this time represented by silver and copper coins, and issue out notes (real money) to various banks representing the value in these reserves. And it was a good thing, except that no one anticipated the dawn of an electronic money age or the possibility (which existed even then) that the Central Bank such as the Federal Reserve could be privately owned. That age has come. In the UK alone more than 95% of the money in circulation is electronic money with transactions carried out on a mobile platform. This allows banks to create fiat money (money not pegged to any standard, air money) through issuing loans, just like the old times. The value of this new money rises when banking costs and interests are factored in.
There is a ratio of real money; Central Bank issued money that is in circulation. In England this ratio is 4%. Private Banks are expected to maintain a certain amount of this money as core capital. It is from this money that they meet small demands. Ideally, every time a borrower borrows, a bank ought to remove from its core capital and other deposits and give the borrower in exchange for real wealth such as land and capital as collateral. However, in this new electronic age where demand far outweighs supply, banks will credit the borrower’s account with fiat money instead. The money lost is toped up by other real money deposits thus maintaining the core. To offset his loan, the borrower will withdraw real money from another bank in effect reducing its core capital and raising that of the borrower bank. He could also get real money from non-bank sources such as home savings to top up the core capital of the borrower bank.
Banks also accept real wealth such as land and capital as collateral for their loans. As a result, the value of these factors will sky without any resultant productivity. These will be possessed by the bank in case of a default. Either way the borrower bank profits while the ratio of real money in the system remains unchanged.
The easy money banks make is invested, not in growing wealth as classical economy would have it, but in speculation. This drives the cost of housing upwards leading to an increase in the cost of living and therefore an increase too in the rate of defaults. Eventually the system crashes (usually, after the large lenders have exited the system as explained above).
To put this into perspective are the words of Paul Tucker (deputy governor of the bank of England as he was then) writing in the Bank of England Quarterly Bulletin 2007 Q3/ Vol 47/ no 3, that “By farthest role in creating money is played by the banking sector” And those by Prof. Richard Werner, an economic industry stalwart, that “Banks create money, they do not lend it. When a bank gives out money, it pretends that you have deposited the money…it has to invent liability…this is how the money supply is created.”
Law to protect the top
Because an economy is financed by debt (fiat money) government usually has no option but to bail out banks when markets crash. Otherwise there will be riots. Money for bailouts comes from citizen taxes. When it gets to the bank, depositors only recover their deposits to a certain amount- Sh300, 000 in Kenya vide the Kenya Deposit Insurance Act.
Everything else is lost. More so, the law on winding up and bankruptcy demands that preference shareholders be settled first and in totality, never mind that these shareholders, as has been demonstrated, are often the cause of the collapse.
Corporate veiling ensures that shareholders are rarely held accountable for any liability arising out of their companies’ activities. But most curious perhaps is how it’s the industry players who are charged with regulation. It’s no wonder therefore, that entities such the Federal Reserve so readily endorse bailouts and reductions in interest rates or that auditors often miss a looming crisis. All these serve to lure the trusting borrower and start the circle afresh.
Legal tax avoidance, protectionism for top industries and a proportionate corporate tax are also ways in which the legal system is rigged in favor of the top.
Neo classical economists often invoke trickle-down economics to justify the money at the top. Unfortunately by the time the money is getting to the bottom it usually has lost its value because those who had the money first spend it on the same basket of goods that drives costs upwards. It’s like the bottom is working for free!
Finally, thanks to lobbying, plutocracy has totally supplanted the idea of citizen sovereignty. Legislators no longer represent the will of the people who elected them rather, corporate interests and those of other interest groups. Recent study reveals that in the US alone, for every congressman there are five lobbyists, each representing a corporate. The same study reveals that the biggest companies have an excess of 100 lobbyists representing them spending almost 35 times more than public interest groups! Through bribes, blackmail, threats, leveraging and trading favours, the corporates almost always have their way!
The people that control the system are the shareholders in these entities and the faces behind them. Ultimately control can be traced down to a handful of dynasties. Taking advantage of the resources at their disposal, these financial elites manipulate democracy in their favour. As Smedley Darlington Butler, for a long time America’s most decorated marine, reveals in his book “War is a Racket” and as Martin Meredith concurs in “The State of Africa”, they sponsor governments to manufacture crisis for their profit. There is no end to crisis because behind every crisis is a profit motive.
