L: Doug, one of the complaints the Egyptians have of the rulers they are showing to the door is corruption. It's the same in Tunisia. It seems that more than the lack of freedom or even the secret police, it's government corruption that bothers citizens the most. This fits with your concern that ousting the old bosses will just lead to new bosses who will be every bit as bad; these people don't want to get rid of their governments, they want those governments to work. And yet, I've heard you speak of making corruption your friend. Can you tell us what you mean by that?
Doug: Sure. As always, the place to start is with a definition. This is critical, because people use terms like corruption in nebulous ways that enable sloppy thinking. Unless you can define precisely what a word means, you literally can't know what you're talking about. That's one reason why listening to commentators like Hannity, Beck, and O'Reilly is such a frustrating waste of time. These people are constantly conflating concepts – like the idea of America with the reality of the U.S., or confusing capitalism with fascism, or war with defense – because precise definitions often get in the way of emotive rhetoric.
L: My Webster's says corruption is:
A: Impairment of integrity, virtue, or moral principle. Depravity.
B: Decay, decomposition.
C: Inducement to wrong by improper or unlawful means (bribery).
D: A departure from the original or from what is pure or correct.
Doug: Yes, I looked it up too, and those definitions are accurate as far as they go. But they don't get to the heart of corruption, its essence, and why people hate it – even while it is often a necessary thing. A more meaningful definition – certainly when it comes to political corruption – is: a betrayal of a trust for personal gain.
L: Hmmm… Yes, that makes sense to me. Corruption is not just bribery of officials, though that's the context we started with. It's a bigger idea, and the "personal gain" angle is important.
Doug: Sure. One can find corruption within corporations, as when directors betray their duty to the shareholders for personal gain. Or churches, as when priests, for pleasure, betray the trust of the young people under their guidance. Even a parent can be corrupt, if he fritters away on high living money intended to be left to his kid. But those types of corruption stem from personal weakness and personal vices. They're horrible – but corruption in government is much worse.
Only government can impose its will on you by law, and back it up with a gun. And with other sources of corruption you can – theoretically at least – go to the government for redress. But when the government is corrupt, it's hard to get the state's right hand to cut off its left. Not only that, but government – partly because its essence is force – concentrates corruption, and incubates it. If a company or church is corrupt, one can quit them. But citizens are stuck with their government – and they'll probably keep paying taxes to it regardless of their feelings toward it. A discussion about corruption is necessarily a discussion about government as an institution.
L: Because government officials have power that can make or break fortunes. And that creates incentives among those on the receiving end of state power to try to sway it to their advantage.
Doug: As Tacitus said in the second century A.D., "The more corrupt the state, the more numerous the laws." It's absolutely predictable that as all these governments around the world – and I mean all of them – respond to the ongoing crisis with an ever-accelerating onslaught of new laws, there will be more and more corruption – and frustration with that corruption.
Tacitus was right. But he could just as accurately have said, "The more numerous the laws, the more corrupt the state," because lots of laws engender lots of corruption. In other words, corruption isn't the problem. The state and its laws are the problem, to which corruption is an unsavory and unaesthetic – but necessary – solution. Laws create corruption, and corruption engenders laws.
Every time a legislature convenes, they pass more and more laws. That's all they do, all day long. So the body of laws and the accompanying volumes of administrative regulations and procedures to implement them is constantly growing – the whole world over. Legislatures are horrible and dangerous things that bring out the absolute worst in the people who inhabit them.
Laws and regulations are like barnacles on a ship. They keep growing and growing, weighing the ship down, slowing it down. If they aren't scraped off from time to time, they will threaten the ship's structural integrity.
L: Tacitus also said: "The desire for safety stands against every great and noble enterprise." No matter how many times I see it, it always astounds me how the more things change, the more they remain the same. That's really just another way to say that there is such a thing as human nature.
At any rate, the reason corruption results from the proliferation of laws may not be clear to all our readers. Consider the Internet: it interprets censorship as damage and automatically routes around. The market interprets government regulation as a hindrance, and seeks ways around it. (Private regulation, in contrast, is a selling point, as when electronics have the UL – Underwriters Laboratories – seal of approval.) The proliferation of laws increases the incentive to circumvent the law, and circumventing the law, in this context, is corruption.
Doug: My thoughts exactly. A law is passed because it seems like a good idea at the time, at least for some group of people who approves of it – anti-pornography laws, for example. But they don't seem like a good idea to people who like pornography, or even most normal people these days, who don't think human sexuality is inherently evil. Meanwhile, the people whose preferred choices just got made illegal aren't going to change their views because the government passed a law. So they find ways to work around the law.
Consumers then become small-time outlaws, and providers become "organized crime." What does organized crime do? Generally, they try to bribe the people at the cutting edge of applying the law: the police, prosecutors, judges, inspectors, politicians, etc. It's one reason why vice cops, along with drug cops, are notoriously the most corrupt among police.
L: What about anti-corruption laws?
Doug: Stupid – in the literal sense of the word, meaning unwittingly self-destructive. Those laws necessarily have the opposite effect of what's intended. By raising the stakes, they just raise the level of bribery required, resulting in even more severe corruption. Like everything governments do, it' not just the wrong thing to do, but the exact opposite of the right thing to do.
L: Which is… to reduce the number of laws and regulations.
Doug: Exactly. The only way to fight official corruption is to reduce the amount of legal control of officials, particularly their regulatory power over the economy. If there were no government regulators, inspectors, assessors, auditors, and so forth ad nauseam, there'd be no reason for businesses and consumers to bribe them to get the hell out of the way.
L: I can hear some people now, crying in horror, "But that would be anarchy!" I know your answer to that is: "Good!" But to keep this conversation a little more constructive, let's remind people that government regulation is not the only kind of regulation there is; and, of all forces interacting in the marketplace, it is almost certainly the least efficient and most likely to produce unintended consequences.
Doug: Yes. There are many market forces that regulate business activity – and more broadly, cultural forces that regulate interactions between people. In the marketplace, reputation is a very powerful force. So is competition. And so is liability – it's a powerful negative incentive. More broadly, culture is a very powerful regulatory force, which is to say, peer pressure, moral opprobrium, and social approbation restrain people from being naughty far more than fear of police does. And there are also private institutions that have powerful regulatory influences, such as churches, Rotary, Lions Clubs, and the like.
L: Not to mention private companies that sell regulatory services, like Underwriters Laboratories for electronics; various rating agencies, like Consumer Reports; or the numerous magazines, news columns, and blogs that comment on every product, practice, and notion under the sun. But people who trust UL to certify that their toaster won't electrocute them can't seem to see a similar agency doing the same thing for meat inspection. And they gasp at the very notion of a private agency regulating, say, pollution.
Doug: I've never heard of an instance of corruption with UL or Consumer Reports. But government agencies are rife with it – plus incompetence as a bonus. People somehow imagine that because government regulations are backed with the iron fist of the law, they work better, especially when the matter is considered vital. This is simply incorrect. It shows an ignorance of both history and of the state of the world today. Regulation usually becomes so corrupt that it ends up doing the opposite of its intended effect. A business that pays officials to look the other way can do even worse things than they would do if there were no officials, because the official seal of approval falsely tells the people that all is well. That's why the SEC should be called the "Swindler's Encouragement Commission" – because it lulls investors, especially the novices, into feeling they're protected.
Even when that doesn't happen, government regulations' inefficiencies and unintended consequences still result in having the opposite of their intended effects – as when the Endangered Species Act prompts land owners to kill anything endangered they find on their property before anyone can see it, so they don't get their property seized.
It is precisely because some things are so critical that the government should never be trusted with them. Universally – in every country and in every culture – it invites corruption and makes things worse than they would be under private regulatory arrangements and a more vigilant populace.
Strict regulation leads naïve people to think, "Everything is under control." That has two important effects. One, it makes them irresponsible – a belief that they don't have to concern themselves. That general attitude then permeates the society. Two, regulation always creates distortions in the market. It's like a lid on a pressure cooker. Everything looks under control until the whole thing blows up.
That's what lies at the root of the concept of "black swan" type unexpected events. The black swan lands when the amount of corruption necessary to evade laws becomes as onerous as the laws themselves.
Egypt – and the whole Muslim world – are terminally corrupt. Their governments are scams that serve no purpose but to enrich officialdom. Those worthies, though they collect salaries, mainly take bribes for an income. But if there wasn't corruption to work around the laws, every one of those places would be totally impossible to live in. So it's actually a paradox. Corruption in government is a bad thing in that it unjustly enriches officials who are betraying a trust. But it's also a good and necessary thing, in that without it nothing would happen at all. It's a shaky arrangement that lasts only until the corruption becomes as bad as the laws themselves. It's like the mercury that was once used to treat syphilis – too much, and it will kill you as surely as the syphilis.
L: I think the point of government-sponsored irresponsibility is particularly important, and often overlooked. I've long thought that it was FDR's New Deal that really pushed America over the edge, not so much because of the economic cost, but because it made it very clear to people that they did not need to be responsible for themselves. Big Brother now takes care of them when they get old, or should they fall ill, or lose a job – no need to plan ahead or save… It's no wonder our culture has transformed from one of individualism and self-reliance to one of group-think and reliance on the state, populated by entitlement-minded couch potatoes.
But what do you say to people who point to places like Sweden – a highly government-regulated society that seems to work? Such a nice, clean place – with lots of government.
Doug: It's a good point. Sweden is at the low end of the corruption scale, but it's not because they have laws against corruption – everybody has those. It's because of the culture – the peer pressure, moral opprobrium, and social approbation I mentioned earlier. Sweden is a small country where word of misdeeds spreads quickly. It has a highly homogeneous culture based on deep-rooted traditions, and there's a high degree of consensus about how things should be. That makes Swedes cooperate with the large body of law that reflects that consensus, much more than would happen almost anywhere else – or is even possible anywhere else.
Out of a couple hundred countries in the world outside of Scandinavia, I can think of two other places that have a similarly powerful culture that makes a "big-government" approach to managing society seem to work: New Zealand and Uruguay. These places are small, relatively isolated, homogeneous, and with powerful cultural traditions that have – unfortunately – been codified into law. These countries, coincidentally, also have the three oldest socialist governments in the world, all dating back to the turn of the 20th century. Trying to bribe officials in these places – even Uruguay – is pretty much out of the question.
But these places are anomalous. Because of their rare characteristics, they can't be held up as role models for other places. Almost everywhere else – where there's more diversity of ethnicity, culture, much larger population, and so forth – Scandinavian socialism wouldn't even have the appearance of working. And, I'd argue, it won't work much longer in Scandinavia either; Sweden and these other places will ultimately collapse under the weight of their mass of laws and socialist intervention in their economies.
L: It's interesting: these countries where a high degree of legal regulation seems to work are also highly homogeneous and have very powerful cultures – makes you wonder if the laws are really doing anything at all, or if they are just window dressing on more powerful social systems.
It makes me think of the many experimental societies tried out in the 19th century in the U.S., when there were still open frontiers to which one could escape with like-minded people and try to do things differently. Most were communes. And most were disasters. Some worked, and a few even still exist in vestigial form today, like the Amana colonies. Those that worked best were religious communes. Just goes to show that if you can go beyond homogeneity and get unanimity, you can create a society that seems to defy all experience to the contrary. When everyone buys in, amazing things can happen… at least for a while.
Doug: Almost anything can work for a while. Some monasteries approach an almost perfect state of communism. It's possible because everyone there chooses to be there and live according to those rules. Unanimous consent. But that's not possible in an entire country, and even the super-majority buy-in of highly homogeneous cultures like New Zealand and Scandinavia are not possible in 98% of the rest of the countries in the world. If you look at the rest of the world, the more socialistic and regulated the country, the more corrupt it tends to be. And the larger the country, the more disparate the population and divergent the mores, the less effective the government's regulation.
L: That would cover China, Russia… Brazil, Mexico.
Doug: And Argentina, where I am now. The customs inspectors down here, for example, all expect to retire as multi-millionaires. That's because they have so many laws on what you can export or import, how, when, why, it's almost impossible to comply with – or even know – all the laws. It's much cheaper and easier to get the inspector to look the other way with a well-placed envelope.
There's good news and bad news in this.
In itself, corruption is a bad thing – it shouldn't have to be necessary. As I touched on earlier, insofar as it's necessary, it's also a good thing. If we can't eliminate the laws that give rise to corruption, it's a good thing that it's possible to circumvent these laws. The worst of all situations is to have a mass of strict, stultifying, economically suicidal laws – and also have strict, effective enforcement of those laws. If a culture doesn't allow people to work around stupid laws, that culture's doom is further sealed with every stupid law passed – which is pretty much all of them.
L: Strict laws, strictly enforced, is a recipe for paralysis. I've often said that while Mexico is much less free than the U.S. on paper, it is much more free in fact. People in the U.S. fear their government, especially the IRS. In Mexico, people build what they want, eat what they want, sell what they want – tax-evasion is the national pastime.
Doug: Right. This is one of the reasons why, though I've lived in New Zealand quite a bit over the last ten years, I'm not really interested in hanging my spurs there any longer. Although it's gotten vastly better since the reforms of the mid-‘80s, it's still a dull, insular place with a lot of ingrained socialist attitudes – but not much corruption to help you obviate them. And I wouldn't want to live in the Scandinavian countries either. They have all these incredibly stupid laws that sheep-like residents obey, enabling great tyranny – but it goes unrecognized because it has such popular support. It suits me much better to live in a place like Argentina, where there's an equal number of stupid laws, but nobody pays any attention to them. And when there is a problem, it can most often be handled – informally.
L: I won't ask you on the record if you've ever actually done that. Interesting comment about Scandinavia – I was just on Google News yesterday, and one of the top video news stories was a clip about some poor woman in Sweden who's had her twin daughters taken away by the child protection busybodies. The children were taken – without notice – from their school, and the woman didn't even know it was an official abduction until she got a letter a week later. The real horror of it is that there isn't actually any evidence of wrongdoing on the woman's part. The law is preemptive and protective – the bureaucrats are authorized to remove children from their families if there might be danger to them. No due process, and forget about "innocent until proven guilty." The breathtaking assumption is that it's better to rip children out of their families than to find out if there's a real problem first. This could only hold sway in a place where the culture is one of great confidence in the wisdom and benevolence of the state.
Doug: Scandinavia is on a slippery slope. I wouldn't be surprised if a very nasty "black swan" the size of a pterodactyl landed there. The U.S. isn't far behind. Big Brother is coming out of the cellar, where he's been chained up, in the U.S. And I'm afraid he's so strong and nasty that few people will be able to pay him enough to leave them alone.
There have long been local pockets of notorious corruption in the U.S., of course: building inspectors, people like that. On a national level, the DEA became very corrupt early on – a natural consequence of "regulating" an industry that runs on billions in cash.
Other federal agencies are more subtly corrupt. Generals are paid off by being hired by defense contractors after they're mustered out. FDA types are hired by the drug companies and large agribusinesses – and executives from those companies become high-level bureaucrats in the FDA. Politicians rarely take envelopes of cash any more. They wait until they're out of office to collect millions in directors fees', book deals, speaking tours, stock deals, and the like. Bill Clinton is a perfect example of someone who went from near penniless to a net worth of $50 million-plus overnight. The Clintons have made a huge leap from the days when Hillary had to take a $100,000 payoff in the guise of her totally transparent cattle trading scheme.
The problem now, though, is that there are giant police bureaucracies like the TSA and the FBI that have no direct way of getting paid off. So they enforce the idiotic laws like robots. Other bureaucracies like NSA do their damage remotely, too far from the victim to be negotiated with. This is a real source of danger.
L: I'm afraid it does look that way. Okay, now that we've looked at what the beast is, let's talk about making it our friend. Seems like the last thing anyone would want to do…
Editor's Note: Due to the length of this interview, it will be concluded in next week's edition.
[In today's highly politicized economies, political unrest, government corruption, and strict new regulations can very much tilt the odds of successful speculation against you. That's why every month, Doug and the other editors of The Casey Report analyze the global big-picture trends, to inform subscribers where the best profit opportunities lie and which investments you shouldn't touch with a ten-foot pole.
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