Governmentality (a faith in the authority of elected officials and their civil service) also shows through in “Mandate integrated reporting”, “End the default practice of issuing quarterly earnings guidance”, Align compensation structures with long-term sustainable performance, and “Incentivize long-term investing with loyalty-driven securities.” These have not yet emerged – indeed what has emerged is current business practice – and likely will not without a push from government to “mandate” what the market cannot provide by iteself. Unsustainability is a market failure that government can correct. Even if we accept the former statement – which is not self-evident – it is doubtful that government can fix it appropriately. Philosopher kings might but Gore and Blood are not of that ilk.

This very conventional approach to sustainability is a reflection of simplistic, reductionist thinking. Do we really know what sustainability is? In my view it is a pathway not a goal, it is a tendency or direction not a specified outcome. As humans change their behaviors, their environment will change both from its own internal processes and our interaction with it. If this is so, humans will have to continually change their behaviors: no silver bullets exist – and likely never will.

What does it mean for humans to change their behaviors? This is about more than corporate governance or profit horizons. It is about how interactions between economy and society change who we are, what we want, and how we behave. Capitalism, as Marx knew, is not only about firms and markets. It is in the end about society and the people within it that society constructs.

Capitalism may become sustainable but in the end it is down to the mass of individuals (some of whom control the decisions of firms) to choose what is both good for them and for the planet. We are a long way from that.

Leadership is variously defined but essentially amounts to influencing a group of people, or everyone in the nation, to change their behavior so that they act collectively toward some goal that the observer wants. Coaches want captains to enthuse the team to win, Tea Partiers want leadership to shrink government, and business people want economic leadership so they can figure out how to increase profits. Leadership is getting everyone to do something that they would not otherwise do to produce some outcome.

Leadership is benign authority. Instead of forcing us to change how we behave and change the choices we make, leaders persuade is. We follow them and do as they suggest because we choose to. Authority forces us to change our behaviors; leadership makes us voluntarily change.

Leadership and authority often are conflated. The coach and the captain can lead the team because they have the authority. In political circles, the U.S. President can fix the economy because he has the authority to lead if only he would choose to. David Cameron, the British Prime Minister, can lead in stopping the recent riots, because he can force the police to change tactics.

Authority simplifies systems. By forcing specific behaviors it reduces the diversity of responses to changing conditions. Leadership does the same. If leadership unifies behaviors among diverse agents, it has the same effect through a different channel. Authority changes behaviors but leadership changes the mental model of agents. While the effect may be comparable the mechanism is not. Ethically, leadership may be more generally acceptable but the effect is the same: the system is simplified. Whether all agents choose to act the same way because they have adopted the same mental model or whether they are required by authority to act the same way, the observed effect is the same. Complexity is wrung out of the system.

Is simplification of the system good? In part that is a matter of judgment. If the simplification unifies the behavior of disparate agents toward a preferred goal, presumably it is. But if complexity benefits the system, increases it resilience and adaptability, any simplification is negative.

Although in which dimensions it may be isolated from the rest of human society is not clear, for our present purposes it reasonable to treat it as a system and to accept that it is complex. A system can be defined in terms of the rules that govern the connections and relationships among its elements, and its purpose. The rules that govern the United States are clear, it purpose is contended.

What is the purpose of the United States? It is to provide for the security and welfare of its citizens. Exactly how to translate that into government structures and policies is debated, in this election quite angrily. Similarly, there is no consensus on the degree to which the nation differs from the fifty states.

One thing, however, is clear: what the United States is and how it operates politically is governed by the rules that established it. If you are really angry about how politics is done or how ‘Washington operates’, you do not have to look far: it is in your pocket. The US Constitution determines the structure of politics and how values such as the purpose of the system are debated.

The Constitution is a creation primarily of the eighteenth century experiences of wealthy colonial landowners. As such it requires that the executive branch is weak and subordinate to the Congress. It is curious, therefore, that so many American voters expect the President to fix the economic ills created by the economic decision of 300 million consumers. How can a President who is dependent upon Congress for policy rules create or prevent economic booms or busts, especially in a globalized economy?

Why does Congress behave as it does? In large part because of the rules set by the Constitution. If 535 Representatives and Senators are venal and spend citizens’ money irresponsibly, it is because of the rules governing their election from the 50 states. If Senators are responsible to whole states and Representative to districts, they will seek the greatest benefit for the people who elect them. If everyone wants something from the Federal government, the easiest way for the 535 to get re-elected is to give them something by spending someone else’s money. That is natural not malicious. Sending new faces to Washington will have little effect.

Finally, it is appropriate for Americans to look in the mirror. To what extent has more than two centuries of living within the rules of the Constitution defined what it means to be an American? How has that history created a culture and education system that has molded the expectations and purposes of the citizens of the United States? Surely, it means something to live in America under the rules of the US Constitution. It molds our lives and beliefs in myriad ways even if we cannot define exactly how it makes Americans.

Good or bad, America is the way it is because of the rules established at its foundation. The Constitution is a beautifully worded, politically debated document that encapsulates a negotiated philosophy that is firmly grounded in the 18^th Century. And it has made American what it is. To make it something different we would need to change its purpose or the mind-set that underlies this system. Because the Constitution determines both how the purpose of the US system is decided and the mind-set that underlies the system, we would need to change the Constitution. And the Constitution has rules for that, too.

The US economy is the sum of the actions of 300 million Americans, thousands of firms, and even the choices of people, governments, and firms beyond our shores. If this not producing what we want, perhaps we want the wrong things. Our expectations, shaped by decades as the world’s leading economic power, are too high.

Americans should be angry at themselves. If they have lost their job, or their house is ‘underwater’, or can’t afford a new car, they are directly or indirectly the cause of their own suffering. Assuming that ‘the economy’— that they think of as something separate from the people who constitute it—will always grow and give them more, Americans have spent too much, borrowed too much, and saved too little for the rainy day that has now arrived. Their anger is like King Lear on the heath raging at the storm. Except that this storm is one we have created for ourselves.

The climate is a complex natural system which is why scientists have not been able to come up with precise forecasts of the effects of increased human emissions of greenhouse gases. Skeptics who claim that the inability of climate models to forecast next year’s weather do not understand this. Because the atmospheric system interacts with complex terrestrial and oceanic systems and the effects of those interactions are then visited upon a complex human system, it is not possible to predict what ills society will suffer. And because this is a singular event without precedent, probabilities are guesswork. It would seem to be prudent to avoid the worst predictions of the effects of climate change but governments are unable to act and individuals are ineffective. The system is too complex to be pushed around by bickering politicians; possible policy changes are meaningless. Only a change in the underlying ethic of the system or the ideas and beliefs in the heads of the mass of individuals can have any useful effect.

The underlying ethic of the system is capitalism and something similar is happening in the wholly human world of money. In the US (and many other rich countries) income inequality is growing and wealth is increasingly concentrated in the hands of the few. The great mass of the population have less to spend so they in the last two decades they have borrowed more and remain tapped out. Poorer people have a higher marginal propensity to consume than rich people who save more of their income which is why extending unemployment payments has a greater effect on consumption and incomes than reducing taxes for the rich. Therefore, if the rich increase their share of national income, consumption should decline. Consumers only were able to increase consumption from 63% of GDP to 70% by borrowing heavily and that cannot last forever as we have seen in the last two years. Meanwhile, corporate profits continue to grow their share of national income. Just between Q1 2008 and Q1 2009 profits grew from 23.55% of national income to 25%. If corporate profits continue to grow and the rich continue to get rich, who will be buying? Marx warned that an excessive accumulation income and wealth by the capitalist class must inevitably lead to insufficient consumption to support production, leading to a collapse of production and profits. The rich who are powerful in a capitalist society cannot help themselves. Only a few got hurt in the economic collapse of 2008-2009 while millions living payday to payday lost their jobs. But will they suffer when consumption, the engine that drives the US economy, fails to continuously increase and production and profits fall? Will the economy collapse from insufficient demand or will it just limp along for years?

Neither climate not capitalism is susceptible to the sort of easy fix that politicians can sell and voters can understand. If not doomed to massive changes in climate or economic collapse, we are doomed to more of the same including fiercer storms, more drought and floods, and greater economic volatility.

The chairman of Britain’s Financial Services Authority queries the social value of most modern financial innovations and Paul Volcker has commented that the only useful recent financial innovation has been the ATM. There is an increasing recognition (except among free-market idealogues) that deregulation allows markets to run away from their purpose to provide a net benefit to society. However, regulations rarely succeed in reigning in an industry as rich and powerful as banking and finance.

It is not possible to force markets to provide specific benefits to society. But it should be possible to reduce wayward behavior that serves only to reward the players and do nothing for most of the rest of us. Societies survive and thrive by inhibiting practices that are bad for the society and encouraging practices that are good.

Complexity suggests – and most people except bankers, their lobbyists and politial shills, and free-market idealogues – would agreethat we must cut the banking industry’s political power by reducing the biggest firms down to a more reasonable size so that their market power is less intrusive. Increase competition and diversity (much the same thing as diversity breeds competition and competition encourages innovation and diversity) among market players so that the market (and the industry) is less able to suck rent from the economy and harm society.

Now, where to start if Wall Street owns Washington . . . .?

The US constitution is designed to protect individuals from the powers of government. It constitutes the negative rights against government interference in the private lives of the American people. But today, in a way that could not have been conceived of by our country’s founders, We the People need protection from big corporations and the Supreme Court is not on our side.

In the Citizens United v. Federal Election Commission case the Roberts Supreme Court, in the words of Justice John Paul Stevens “blazes through our precedents” in a “dramatic break from our past.” The court also struck down the “honest services” statutes in the appeal of Jeffrey Skilling, the CEO of Enron when it collapsed and supported the “mandatory arbitration clauses found in so many contracts, all designed to keep the fate of corporations out of the hands of judges and juries.”

Theodore Roosevelt railed against rich industrialists whom he called “Malefactors of Great Wealth.” Today the people suffer not from the actions of the great individual capitalists but the decisions of faceless captains of corporations who, with the consent of their boards of directors, pursue strategies that benefit themselves and their companies with little thought for the little guy. This is not the capitalism of entrepreneurs and small business that is so much a part of American culture and folklore. This is the capitalism of massive corporations with no loyalties beyond their own interests and corporate profits. This the capitalism of lobbyists and high paid lawyers, of congressional earmarks and “too big to fail.” This is the revered capitalism of the “little guy” pulling himself or herself up by their bootstraps; this is being ground under the boots of employers that care ever less about our welfare. We have seen the dangers of “too big to fail” corporate capitalism, Congress has failed to fix the problem, and the Supreme Court is not on our side. BP is just one example of large corporations that lay us off, destroy our environment, and corral government subsidies to boot. Transocean moved out of Houston to Switzerland and registered the Deepwater Horizon rig that blew up in the Marshall Islands to reduce their safety and operating costs. Where is Teddy Roosevelt when we need him?

The economic system is complex but not complex enough. An economic system constituted of a larger number of small and mid-size firms would be more resilient and might grow faster. Banks that needed their customers would care for them better. Following the demise of the Glass-Steagall separation of commercial and investment banks and acceptance of interstate banking the national banks emerged that make their money trading commodities, buying hedge funds, and pandering to the major industrial companies. If community banks fail only the shareholders lose; if a national bank fails the nation loses. If there were no national banks to fail, the nation would be at less risk.

Once upon a time technology dictated economies from scale. Henry Ford built cars in massive integrated plants because that was the only way to do it then. Today’s technology permits fragmentation, smaller production units, and tailor made products instead of mass production (any color you want as long as it’s black). American needs to change but the big corporations won’t let it.

Small really is beautiful.

As Thaler comments: “Neither the private nor the public sector seems up to handling these kinds of problems. And we can’t simply wait for the next disaster, because, as people might say if they had to use G-rated language, stuff happens.” Centralized, top-down government seems ineffective and it is extraordinarily difficult to specify incentives that always lead to the end that is desired—even if the political system can figure out what that is. We note that the Republican governor of Louisiana is demanding that the drilling moratorium be lifted even while he scores Obama for not having prevented or cleaned up BP’s Deepwater Horizon spill.

The Gulf oil spill is another example of the social risks of unregulated markets. From the Enron and WorldCom frauds in the beginning of the decade to the Madoff Ponzi scheme and the derivatives disaster of the end of the decade, the first decade of a new century has been a harbinger of the essential ungovernability of an increasingly complex global economy.

Evidence is now surfacing that there was poor coordination between the many companies performing a wide range of services on and around the Deepwater Horizon rig that blew up on April 20. Each of these companies was pursuing its own interests with incentives to cut corners to reduce costs. The well was late, BP was running over budget, and did not follow its own procedures. There were disagreements between BP, Transocean and Halliburton—nobody seemed to know who was in charge. Transocean would make more money by delaying moving the rig but BP would profit by closing the well as quickly as possible. The companies that ran the undersea robots or ran piping would gain from delay.

Despite the Exxon Valdez disaster in 1989, the oil industry has made little effort to improve safety conditions or prevent well blow outs in deepwater drilling. As the New York Times commented: “Engineers trying to control the blowout are using the same tactics they used in 1979 when the Ixtoc I well blew up in the Bay of Campeche off the coast of Mexico.” At the same time BP, like most other companies drilling in deep water requested, and were granted by the Minerals Management Service of the US Department of the Interior, many exemptions from established techniques and procedures, all of which reduced the cost of the well but increased its risk.

Americans expect both too little and too much of government. On the one hand they want a smaller government, on the other they want a much more effective government. They want less government until they want their government to protect them and their interests.

President Obama is now being blamed for the oil spill—a caller to a radio program even stated that the spill would not have happened if we had not elected a black man to the White House! Obama may have appeared too cool in the first days after the accident happened but he is powerless to stop the spill. The government may be powerful in some ways but it neither has the knowledge or the technology to cap the spill. Only BP and other oil industry specialists can fix the problem they caused. This is not a failure of government; it is simply an incapacity created by the complexity of private industry.

We’ve seen the same recently in the new financial services regulations being negotiated in Congress. Only the perpetrators of the crime against society have enough comprehension of what caused the harm to fix the problem. And they are not interested in fixing the problem if that reduces their profits.

Unsurprisingly, Americans have lost trust in both their public and private institutions.

Organizations are ways to coordinate the activities of many individuals to achieve some larger purpose. And markets are ways to coordinate the activities of organizations pursing their interests. There is no denying that the federal government is large and poorly organized, with distorted incentives that encourage employee convenience and rule following. The delay in approving berms to protect Louisiana’s shoreline is a consequence.  But no organization would be able to ‘manage’ the complex interactions that have evolved within the economy to mitigate the social and environmental harm that the pursuit of profit can cause. Not even organizations with the singular purpose of profit are wholly efficient when they are as large as BP with revenues of $239 billion (equivalent to a small country) and over 80,000 employees in 30 countries. BP had procedures for deepwater wells that were deliberately by-passed in the field.

Americans believe that their presidents have god-like powers to save them from themselves. As Gene Healy’s recent book on the US presidency concludes: “Over and over again we begin by looking to the president as the solution to all our problems, and we end up believing he’s the source of all our problems.” He wasn’t and he isn’t. Like his predecessors Obama is hobbled by the complexity of the political-economic system within which he has to operate. No president can make the radical changes necessary to optimize the system’s social benefits and mitigate all its harms. We have to accept the social harms that capitalism generates or change the system ourselves from within through the daily choices that we make.

The last decade has given us the dot.com bubble, Enron and WorldCom and other frauds, Bernie Madoff, a stock market that has gone nowhere as the rich get richer, and major banks being bailed out to prevent systemic failure. In the last few weeks we have the Gulf Oil spill and Johnson & Johnson being hauled in front of Congress to explain its filthy factories and contaminated medicines. Meanwhile, Congress is negotiating to weaken oversight of critical industries and the Federal Reserve is pouring nearly free money into the largest banks to increase their bonuses.

All the recent activity in Congress is fiddling while Rome burns, torched by the ideology of free markets. Donella Meadows has written that the two most effective ways to change complex systems is to modify the goals of the system or change the mindset or paradigm of the agents in the systems. Marxists argue that the goals of the system—the ever more combative search for rent (more than normal profits)—has corrupted the system. Less extreme commentators have said much the same: greed has got out of hand. But perhaps what has happened has gone beyond just the goals of the system. Perhaps we—every one of us—have been changed by the unrelenting free-market discourse of the last decade and more. Perhaps we not thing like Ayn Rand’s heroes with no interest beyond ourselves. If the Americans now share a “grab it for yourself” mindset or paradigm, what can save us?

Congress, laws, rules and regulations are irrelevant because they do not change either the goals of the system or the mindset of the participants in system we call America. With the mindset we seem now to have, government is neither wanted nor honored. Laws are meant to be broken—everyone else does it—rules regulations avoided, and responsibility denied. Take whatever you can in every way you can. It’s come to this: every man, woman, and child for themselves. If this is what the conservative small government people wanted, it is a gross misreading of Adam Smith and Friedrich Hayek.    

The only thing left, Meadows tells us, is to transcend paradigms. I’m not sure how we get a mass movement going to get people not to believe any paradigm—yet to follow a mass movement. But each of us can resist all paradigms—from left or right—remaining skeptical but informed and helping our friends and relatives to release their minds from slavery to a dead idea about free-markets and individuality (see an earlier rant on this blog about the dangers of believers here).