"The Corporate Elite versus the Wealth of Nations"

Sydney M. Williams

Thought of the Day

“The Corporate Elite versus the Wealth of Nations”

May 5, 2010

George Friedman, with dialectic persuasiveness, argues in a recent essay, “The Global Crisis of Legitimacy”, that it is the political system, which over time has reallocated risk away from those managing businesses that led to the credit crisis. He argues that the “political elite” enabled the “economic elite” to enrich themselves at the expense of the wealth of the nation.

Mr. Friedman, a Hungarian born U.S. political scientist with a PhD in government from Cornell, is the CEO of Stratfor, a private firm that gathers and disseminates global geopolitical intelligence.

In the essay he writes, “The precise distribution of risk within an economic system is a political matter expressed through law…The state defines the structure of risk and liabilities and ensures that the laws are enforced…The entire scheme is designed to increase, in Adam Smith’s words, the ‘Wealth of Nations’ by limiting liability, increasing the willingness to take risk and imposing penalties for poor judgment and rewards for wise judgment.” The success of the system was not determined by whether individuals benefitted, but whether the wealth of the nation was enhanced.

The financial crisis occurred when “the corporate elite used the law’s allocation of risk to enrich themselves in ways that undermined the wealth of the nation.” They enriched themselves through systematic imprudent behavior, “while those engaged in prudent behavior were harmed.” In the Lehman bankruptcy, long term shareholders were devastated, yet former CEO Richard Fuld walked away with hundreds of millions of dollars.

The conclusion Mr. Friedman reaches is that the crisis was political in nature, as the modern corporation with limited liability is a political creation. “The public”, he writes, “is cynical about such things [and] expects elites to work to benefit themselves. But at the same time, there are limits to the behavior the public will tolerate. That limit might be defined, with Adam Smith in mind, as the point when the wealth of the nation is endangered.” This argument explains why the Obama administration must go after Goldman Sachs and others who benefitted at the expense of the nation and those more prudent – savers, in particular. It also explains, in my opinion, why Lloyd Blankfein will likely resign – not because he did anything wrong – but because Goldman Sachs is bigger than the man; the nation, as well as shareholders, are better off with the firm continuing and the man gone – a sacrifice, but seemingly necessary.

A new Presidency always represents on-the-job-training. George Bush was confronted with 9/11. Barack Obama has had to deal with the aftermath of a credit crisis that has challenged conventional economic responses. As George Friedman writes, nations consist of three basic systems: political, economic and military. All three systems have their elites. It is the interaction of the people within these systems that bear watching; success will be determined by the balance found.