The (Institutional) Bezzle [Joe Mannix]

We have a great group of commenters in the Horde, and a wide variety of opinions on the state of the world and the problems of our corrupt systems. One commenter in particular has posted a comparison between current societal institutions – government, academic, scientific, cultural, etc. - and a failing enterprise. “Colorado Alex in Exile” has had several comments on this topic, but this one is reflective of the theme (remember: do not comment on old threads or you can get banned!):

The US, and the West in general, is a corporation whose previous managers built up a whole lot of social, political, and economic capital, goodwill, brand recognition, and customer loyalty. The new management are all freshly minted MBAs who proceeded to piss it away with harebrained schemes, sketchy new ventures, and mismanagement. Now they're discovering that they're overleveraged and their goal is to keep cooking the books long enough to get their payout and bail.

I think this is a useful and effective analogy and I have been giving it a lot of thought over the past couple of months since I first saw it. “The consumption of accumulated achievement without producing enough new achievements until it results in collapse and failure” is an interesting premise, and I think there is a lot to it. The part of this comparison that I think needs further exploration, however, has to do with the marked dishonesty of the day-to-day activities of those consumers of accumulated capital. What Colorado Alex in Exile says is true, but there is also the problem of the utter absence of merit and endemic dishonesty that defines every action that our ruling class takes. It explains the harvest we are now reaping, but not the existence of the crop.

Not long ago, commenter “kraken” made a brief comment that stopped me short, especially as it relates to the concepts Colorado Alex in Exile put forth:

Perhaps a direct connection between the amount of Nepotism in a society and its' level of Decadence.... wonder where we are at on that continuum?

I think this may be zeroing in on the missing piece – the “how” behind the “what” – and it immediately reminded me of a piece of economic history that I think might make for a useful analogy for the goings-on in Current Year.

John Kenneth Galbraith made a study of the Great Depression in his book The Great Crash 1929. In that book, he identified a major key concept in corruption. He called it “The Bezzle.” The Bezzle is the accumulated buildup of heretofore unidentified embezzlement and theft throughout enterprises. In his own words:

Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.

Nepotism as a general concept – including various analogues like run-of-the-mill good ‘ole boy cronyism, influence peddling, revolving-door political prostitution, etc. - is The Bezzle of politics. The nepots and their enablers steal the political/social/institutional capital that was accumulated and built by the meritorious. At the beginning, this theft is nearly invisible. It is that “psychic wealth” that Galbraith mentions. The nepots are consuming while the meritorious are still creating and so the consumption goes unnoticed. It looks merely as if there is more capital, but some of it – the part that was stolen and wasted – is ephemeral.

We in the United States – and in the West more generally – have (or perhaps had) more accumulated institutional capital than any other society in history. This was made possible by generally acceptable levels of honesty, trust, accountability and meritocracy. These have been eroding for years, and at an absolutely astounding rate. Within a couple of (or perhaps three at the outside) generations, institutional capital that took more than a century to accumulate has been destroyed by dishonesty, theft and corruption.

What’s worse, Galbraith’s description of the Bezzle applies here in another way – that period of “psychic wealth” during which the defrauded feels no loss because it has not yet been discovered. We were still been producing new institutional capital while accumulated capital was being stolen. This papered over the problem until relatively recently, but it cannot do so forever because the rate of theft has been exceeding the rate of creation for far too long. The difference – the “theft deficit,” if you will – is made up by consuming the prior generations’ surplus.

It is – as Colorado Alex in Exile points out – essentially a form of leverage. In finance, leverage is an amplifier. It makes gains bigger, but it also makes losses greater. The more heavily you are leveraged, the finer a line you must walk. If you’re leveraged to the hilt and your liabilities wildly outstrip your unencumbered assets, one single downside movement – and not necessarily even a very big one – causes your enterprise to collapse overnight. This is a concept that we humans have understood for a long time – indeed, for such a long time that we have a very simple idiom that describes it: “the straw that broke the camel’s back.”

This is where I think we are now. We are consuming at an ever-faster rate while producing at an ever-shrinking rate. I am not sure, but it may even be that we’re no longer producing any new institutional capital at all. The Bezzle has now been discovered and so the failure is accelerating. As Galbraith describes the phenomenon:

In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.

Note all of the articles over the past few years about declining institutional trust. What is declining institutional trust but the social/political equivalent to that watching of money “with a narrow, suspicious eye?” What are the constant exposures of institutional malpractice – from Fed financial chicanery to official persecution-through-investigation, to end-running rules and outsourcing bad actions in bioresearch and intelligence gathering, to exposes of school and police corruption, ad infinitum – but the first faltering baby steps of those “penetrating and meticulous audits?”

So what’s left? We sure haven’t gotten to the improvement of institutional morality and shrinking Bezzle yet. We may not get there. There is an alternative to purging the rottenness out of the system: full, systemic bankruptcy. The remaining capital is consumed in a final ecstatic act of cannibalism and then the body dies altogether.

We will either eliminate the Bezzle and repair or replace our institutions with the capital we have left, or we will continue to consume it until oblivion. Whether we repair, rebuild and survive or follow the other great civilizations onto the slag heap of history remains to be seen.

posted by Open Blogger at 01:31 PM

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