Some Canadians do well in the Numbers Game but the ones that do best are predators. The law controls physical predators like robbers and burglars but many forms of economic predation are legal and, because they are legal, they are not controlled. It's easier to understand why the law winks at the economic equivalent of highway robbery if we look at the way our economic culture developed.
At the simplest level of economics, families and small groups are co-operative and self sufficient. Men and women cooperate in a family because they need each other, men cooperate in hunting groups to kill big game and women cooperate in food gathering because women and children in a group are safe from predators.
In other economies women may tend gardens and men tend herds, but they still cooperate.
As they learn to make tools and implements the men and women who make the best products may make them for others. In the first stages of specialization their reward is prestige and they still hunt and gather their own food.
As society becomes more complex people who make one kind of goods trade with people who make another kind -- tools for clothing, for example -- but in a tribal society most of them still hunt or gather their own food. Even if they could trade for food, hunting and gathering are social occasions and they would not want to be left out.
Author Jane Jacobs speculates on the next step in her book The Economy of Cities. In a very credible scenario she describes how artisans might settle at a convenient point -- near the source of their materials and often near a ford in a river through which most travelers have to pass -- and trade their wares to passing hunters for food, hides and other goods.
As more artisans settle at the same point they form a village with its own economic life, no longer based on hunting and food gathering. Hunters and gatherers bring their produce to the village to trade for tools, pots or other craft goods, and the artisans give up hunting and gathering for their own use.
This begins the division of labor that makes human culture so productive. For the first time we have one group of workers who don't have to find their own food, and another who don't have to make their own tools.
This stage of development also brings a quantum leap in technology because a specialized craftsman in a village can usually make better tools than a hunter in the hills. The critical point in the development of human technology may have been the invention of the ground-and-polished stone axe, about 8,000 BC in Europe and earlier or later in other areas.
The first stone axe was very simple. If you break almost any rock it will have some sharp edges which will cut meat or small branches if you try hard enough. Over the years men learned that some stones can be chipped into daggers, spear points and even axes that are very effective tools and weapons.
But a chipped edge is rough and stones that chip easily may shatter. Chipped stone axes could cut branches and butcher animals but they could not easily cut down a full-grown tree.
The neolithic axe can. If you choose a very tough stone and chip it into roughly the right shape, then grind and polish it to a fine finish, you have a very effective axe. Danish scientists proved that when they took some 4,000-year-old polished stone axes from the Danish National Museum and fitted them with new handles.
With a bit of practice they could fell an oak tree more than a foot in diameter in an hour, or a two-foot pine in two hours. Three men cleared 600 square yards of silver birch forest -- enough for a small farm -- in four hours. The axes had not been sharpened for 4,000 years but they were still in good shape after cutting down more than 100 trees.[1]
The neolithic axe was so good that it has become the accepted marker of the "neolithic" or new stone age, as opposed to the "paleolithic" or old stone age. It was man's first really good heavy tool and, because it could cut down trees, men who had one could clear farmland and build big buildings.
But while an average workman can make a chipped axe out of local stone it takes a rare type of stone and a high degree of skill to make a good neolithic axe. Because of that most people had to get them by trade. By the end of the neolithic age axes made of augite-granophyre stone from one mountain in North Wales were used throughout the lands that are now England, Belgium and Holland. Axes made of obsidian from a mountain in northern Hungary were used throughout most of Europe and axes made of a type of jade found on one mountain in the French Alps were used throughout southern France and most of Spain.
Probably because of the axes, trade and travel exploded in neolithic times. Archaeologists find amber from around the Baltic Sea in neolithic cave dwellings in Crete. Ornaments made from the shells of one particular type of mussel that is found only in the Black and Aegean seas were traded as far north as Poland.
In the Americas neolithic Indians in the city of Cahokia near the present site of St. Louis traded with both coasts of the U.S.A., with tribes in Canada and with the Aztec who lived in Tenochtitlan, now part of Mexico City.[2]
HOW IDEAS TRAVEL
The neolithic axe created trade, trade created travel and travel created civilization.
There were no tourists in the days before trade, because there were no valid reasons to travel. Borders between territories were not marked but they were recognized and enforced, as territorial boundaries have always been recognized and enforced by most animals.
A stranger found in another band's territory without good reason would have been assumed to be either an invader or a poacher, and dealt with accordingly.
Neighboring bands inter-married and partied together but people travelled outside their own band's territory only to weddings and other parties. Most of the time people stayed in their own territory and minded their own business.
But when people don't travel, ideas don't travel. If a member of one band finds a new way to thatch a hut or light a fire or trap an animal other members of his band will learn about it, but from there the idea may spread very slowly. If members of another band visit to party once a year the idea can move to one other band in one year -- but it may take another year to move to a third band.
Trade and travel change all that. Traders are allowed to travel because they have an obvious reason to travel, and most bands will allow traders to pass because they know why traders travel and because they want the goods traders bring.
And where traders travelled, ideas travelled with them. An idea that travels from band to band at party time will move only a few miles a year, but an idea that moves with traders may move hundreds of miles a year. Some ideas are actually contained in the goods, and traders carry the rest. Above all else traders are salesmen, and the one characteristic almost all salesmen have in common is that they are good, and willing, talkers. As the traders talked they spread ideas and, as ideas spread, civilization developed.
ECONOMIC FUNCTIONS
Traders are a new economic group, of people who do not make anything themselves and who do not find or produce their own food. They perform a useful function but they live on the products of others and they can survive as an economic group only if others produce the goods they need to live and to trade.
The first traders were probably the first victims of economic predators. Primitive men may have fought over territory or food -- as monkeys and apes sometimes fight today -- but where there are no concentrations of wealth there is not much motive for robbery.
Trade creates concentrations of wealth, and the goods carried by even a small trading caravan would have been worth a small fortune. In modern times the cargo carried by a single tractor-trailer truck may be worth millions of dollars, and truckers around the world have to keep a watch out for hijackers.
The first organized robbers were probably highwaymen who waylaid caravans and took their goods. In the early days it was probably not considered a crime to rob strangers but, even so, most robbers would have worked outside their band's territory.
Caravans will avoid routes and territory where caravans are robbed, so robbers must move around. That means they will have to work at least part of the time on other bands' territories, where they will be seen as unwelcome poachers.
But there is another way. Robbers who take only a portion of a traveler's goods can call it a "toll" or "duty." If one route is haunted by robbers and another is held by a robber baron who takes only some of their goods, traders will travel the route held by the robber baron. In fact the robbers who waylay caravans on one route may be the soldiers who guard them on the other, but that is not relevant. The soldiers are not allowed to rob people who have paid the toll and who remain within the protected area.
A robber baron lives better than a highwayman because the baron can build a fortress and hold land. As the robbers gained power they attracted sycophants and other hangers-on who were not strong enough to be predators themselves, but who were willing to serve predators in return for a share of the take. Together the robbers, robber barons, soldiers and hangers-on form a new economic group which is significantly different from the others. They are predators, and the people they rob are their prey.
Even soldiers who defend others from predators are themselves predators. Robber barons and soldiers may protect their victims from other predators but their role is still predatory.
By necessity, predators must drop the moral standards of the family and village, and develop their own. Producers and traders depend on voluntary co-operation and repeat business, and if they are not trusted they can't stay in business. A predator's business depends on either deception or coercion or both, and success is the only standard he can afford to recognize.
A lion does not give an antelope a sporting chance, and we don't expect robbers to play fair.
Like traders, robbers and soldiers do not make their own tools or provide their own food but there is another difference. When producers can't produce -- perhaps because of crop failures or other problems -- they don't have to deal with traders, and when their customers have no money traders can't sell their goods. In hard times the voluntary economy slows down.
But robbers and robber barons take what they want whether their victims can afford to pay or not. If times are very hard the predators may suffer too, but as a general rule they will live well even when the producers and the traders do not. Because of this hard times encourage people to become predators, and predators make hard times harder for the producers and traders.
THREE GROUPS
At this point we have three distinct economic groups.
The first are the producers who produce real wealth. This group includes the hunters and the gatherers and the artisans who make axes and other tools and, in more developed cultures, it includes the herdsmen and the farmers and the man who makes the micro-chip for your computer.
Producers are the foundation of the economy and their products are the wealth we all share. If they don't produce, we have no wealth to share.
The second group are the traders and they perform a valuable function but they do not produce their own food, clothing, shelter or other goods. Because they do not produce goods themselves they are totally dependent on the producers, and they could not live without them. On the other hand the service some traders perform is vital, and producers without traders would live a primitive and restricted life. Even though a trader does not produce anything himself his service may add more to the quality of life in his community than it costs to maintain him.
If a producer produces wealth we might say that a trader adds value to wealth. There is a caveat here because while most traders are positive economic factors some, like drug dealers for example, do not contribute value to the economy. We could also argue that the contribution of some producers does more harm than good, but these are both quibbles.
The third group are the predators, and they include both the robbers and the mercenaries who protect us from them. Like traders they do not produce the goods they consume and they are totally dependent on the producers and the traders. Some predators perform vital services but they are still an economic cost to the community that supports them. The soldier who defends a town earns his pay, but he is still a cost the town would not have to bear if there were no soldiers or robbers.
We might also identify a fourth group in the service industry, but this is an illusory distinction. Service workers are essentially either producers or traders, and it just so happens that they produce or trade a service rather than physical goods. It's true that some service workers may act like predators but we could also argue that some traders who deal in physical goods also act like predators. At this stage we are not trying to pick nits, we're just trying to explain how the economy works.
Within all three economic groups we have several classes of people. Among producers, for example, we would include Henry Ford and the village blacksmith and the semi-retired pensioner who sweeps the floor of a Ford factory. They all play a part in the production of goods, and they must all be classed as producers.
Timothy Eaton was a trader but so is the clerk who works in a corner store and the man who sells peanuts on the sidewalk. The scale is different, but the function is the same.
A robber baron is a predator and so is a mugger who works in a back alley. Members of the robber baron's household, like the clerk who keeps his records or the steward who manages his house, may not work directly as predators but, like the pensioner who sweeps a Ford factory, they must be considered part of the organization they serve. As a service worker my dentist is a trader, and so is the woman who books my dental appointment and prepares my bill.
And the same person may move from group to group or be a member of two or all three groups at once. A soldier can own a farm or a farmer serve as a soldier and either way he could sell his own produce, but we're not talking about individuals here. We are talking about economic functions, and the soldier who owns a farm and sells his own produce just happens to fill three roles.
A robber baron who makes the big time may become an emperor and plunder whole countries. Imperial centers were the first large economies which were not self-sustaining and, in some cases, they had to conquer other people because they were not self sustaining.
Empires try to control predation within their own boundaries but they may sponsor predation against outsiders. As a "privateer," or licensed pirate, Henry Morgan had the approval of the British crown when he sacked towns along the coasts of Venezuela and Panama in 1668 and '69.
England happened to be at peace with Spain when Morgan sacked and burned Panama City in 1670 and he was arrested for the crime, but the arrest was a diplomatic sham. After his trial in London Morgan was knighted by Charles II and appointed governor of Jamaica.
Piracy is illegal now but other forms of predatory economics, in which the actor takes profit for himself at the cost of others, continue. The techniques are different but the similarity is recognized in the popular terminology that sometimes describes a speculator or a corporate raider as a "pirate."
SPECULATORS
The most obvious form of legal economic predation is speculation. More than 20 years ago a new copper mine was opened near Kamloops, BC, then a city of about 50,000 people. While the mine was being developed a friend of mine sold his house in Kamloops for about $15,000. Before he moved it had already been re-sold for a profit of nearly $10,000.
A speculator from Calgary had come to town and put down payments on nearly every house that was for sale -- including my friend's.
With the mine opening people needed houses, and the speculator ran the prices up to suit himself. He made about $100,000 profit -- five or ten years' income for a middle-class man, in those days -- for an investment of less than $100,000 for a couple of months.
The speculation was legal but it was an economic sin because the $100,000 did not represent new material goods. In fact the speculator may do more harm than -- for example -- a burglar because if a burglar steals your property you will work to replace it, and the money still represents material goods. A burglar may take your wealth, but he does not attack the money supply of the nation.
Because there were no goods produced the $100,000 this speculator got had to come either from the savings of others or from devaluation of the whole country's money supply. In fact it came from both because people who bought houses had to pay more for them and, when prices rose, the value of all our money dropped.
Legitimate trade is a win-win transaction because both sides gain from it. Like other forms of predation, speculation and financial manipulation are win-lose transactions. When a speculator wins, somebody has to lose.
A speculator might argue that he took a gamble and won. He bet his money on the housing market in Kamloops, and he made a profit. By the same token a mugger in a back alley might argue that he takes the chance that his victim might turn out to be tougher than he is, or armed, or that the mugger himself might be mugged before he gets out of the back alley.
The argument doesn't wash but, in spite of that, most of us accept speculators as respectable members of society. Economist John Maynard Keynes made a fortune by speculation in the futures market, and most of the world admired him for it. Neither Keynes nor anyone else seemed to worry about his effect on the economy.
Speculation in Keynes' day was a relatively small business but now it's one of the biggest in the world and, because many modern speculators trade in the money that keeps our system working, it's more dangerous than ever before.
Every day thousands of speculators around the world buy and sell billions of dollars worth of dollars, yen, marks, pounds sterling and so forth. They may hold them only a few hours but if their trades can make exchange rates rise or fall, and if they are in the "right" position when it happens, they can make fortunes.[3]
They gamble with the lives and hopes of billions of people and they force governments of countries with economic problems -- like Canada -- to spend hundreds of millions of dollars to "defend" their currencies. Because the money traders profit by billions of imagined dollars, which deflate the value of other dollars, we all lose. A few years ago the Swiss-based Bank of International Settlements estimated that money traders handled about $640 billion a day. Economists say that about ten percent of their trades are for commercial purposes, and the rest are pure speculation.[4]
The most important difference between old-time piracy and modern financial manipulation is that piracy used to be sanctioned by a king or a government only if it was practiced against citizens of another country. Pirates were not allowed to prey on their own countrymen, and many of them worked for the welfare of their own nations. That's why Sir Henry Morgan and other pirates were knighted.
But most speculators and other financial manipulators prey on their own countrymen and they are in fact enemies of their own people. Governments don't interfere partly because governments -- many of which are heirs of the old robber barons -- are themselves predatory, and financial predators are supported by banks and other institutions which profit by their operations. By extension many banks and other financial institutions are predators, preying on most of the people they pretend to serve.
Banks are given special privileges so they can serve human needs, but most modern banks and financial corporations serve only themselves. Because their interests conflict with the interests of the community, most of them must be considered to be enemies of the community.
THE FUNCTION OF BANKS
It was not always that way, because the first banks performed valuable services for their customers. The history of banks as we know them today dates back to the 13th century, when some merchants began buying and selling bills of exchange as a defense against highwaymen.
Instead of carrying gold from one city to another a traveler could buy a bill of exchange from a merchant in one city and sell it to an agent of that same merchant in another city. The bill of exchange was easier to carry than gold and, because it had the traveler's name on it, it was of no use to a robber.
Some of the early merchants also accepted valuables for deposit but deposit banking as we know it today apparently got its start in 17th century London, where goldsmiths used to accept money and valuables for safekeeping.
They also used to make loans and, because most loans were taken in the form of credit rather than lump-sum cash, the goldsmiths could lend out more money than they actually had on deposit. As long as they were able to meet depositors' demands for money the system worked well, and it became the key to industrial development.
Industrial development was not possible without banks because in the days before banks there was very little cash money. Aristocrats could build things because they owned land and they could order serfs to work for them, but aristocrats had no use for industrial development. They needed castles and weapons for their private armies and perhaps a mill for their estate, but not much more. If the serfs or the peasants wanted something, that was not the aristocrats' problem.
But the common people had problems. If a village had no mill, for example, even farmers who owned their land had to bring their grain to the lord's mill. That was a problem because the lord's mill served the lord's farms first and, with no competition, it could and often would charge free farmers extortionate rates.
Every village wanted its own grist mill but in the days before banks few ordinary men could afford to build one. A common man could build his own mill if he could raise the money -- but where to get the money? In the world before banks there was very little actual money in circulation, and a whole village could not raise enough cash to build a mill.
But because it can lend more money than it has on deposit, even a small bank can finance a mill. Let's look at the construction of a new mill in the village of Gooblegoo. This is a poor village, partly because local farmers have to haul their grain 20 miles to the village of Bumblerum and pay a small fortune to get it milled.
There isn't enough money in the whole of Gooblegoo to pay for a mill but three years ago local boy Jack Lender came back from London, where he had worked in one of the newfangled banks, and he established the Bank of Gooblegoo. He didn't have much capital but he didn't need much, in those days, and now he's doing all right. He still doesn't have enough to build a mill, but that's no problem.
This year another local boy, Joe Miller, has come home with ten years' experience working at the mill in Bumblerum, and he wants to build his own mill in Gooblegoo.
The local currency is Googoos (Gg) and Lender agrees to lend Miller 1,000 of them. As it happens he has only Gg496 on deposit but that doesn't matter because he won't even have to pay out that much.
Miller needs land for his mill and he buys a riverside lot from John Farmer for Gg200. Farmer takes Miller's cheque to the bank where he applies part of it to his mortgage on the farm, and the rest to the money he owes Jack Mason for work on his house. Mason uses his share to pay off the loan he took to buy a new horse and wagon. Miller has spent Gg200 of his loan, but so far not one cent of cash has actually left the bank.
Now Miller hires Mason to build the building for his mill, Peter Carpenter to finish the interior, Bill Wheelwright to make the wheel and so forth, and he pays them all with cheques on his account at the bank.
Because most of them owe money to the bank and they all have savings accounts there, they deposit their cheques in the bank and write others to pay their debts. They take some money for immediate expenses -- groceries and beer, perhaps -- but most of the money never actually leaves the bank.
In effect the people of Gooblegoo co-operate to build the mill in return for Miller's promise to mill their grain in the future, and the bank brokers the deal.
That's a valid function because there isn't enough money in the whole village to pay Farmer, Mason, Carpenter, Wheelwright and the others in cash. Miller can and will pay for the mill by milling grain, but that will take years and the tradesmen who built the mill have no grain to be milled.
Without the bank there could be no mill. Through the bank people can co-operate to build the mill and, over time, everybody who uses flour will pay for it.
For convenience we pretend the bank had money of its own to lend but in fact there is no real money and the bank is actually a broker for the community. When the bank lends Miller enough money to build his mill, it acts as an agent for the farmers who want a local mill.
The bank makes a profit on the deal but that's fair, because it provides a service and it takes a risk. In this case Lender must be able to judge the local need for a mill and Miller's ability to run it. If both are in place the mill will be a success but if Lender misjudges the need -- or if a drought or some other problem wipes out the next few crops of wheat or if the mill catches fire and burns -- Miller will go broke and Lender will be on the hook for the money. His risk is actually greater than Miller's because if the mill fails Miller will go from broke to bankrupt, but Lender may lose an established business.
FINANCIAL SHENANIGANS
The Bank of Gooblegoo performed a vital service and, through most of the 19th and 20th centuries, banks in the United States were powerful engines of economic development.
That was partly because most American banks were authorized by state charters and, until 1956, they were not allowed to operate across state lines.
When a farmer in Boondock, Iowa, put his money into the Boondock State Bank the bank had to find a use for that money in the state of Iowa. That meant that budding businessmen in Iowa could find the capital they needed, and that's why the United States has major industries in almost every state.
But most Canadian banks have federal charters which allow them to operate anywhere in Canada. Because they can move money around the country, they have been more of a hindrance than a help to development in some areas.
Like the farmers in Boondock, farmers in Elk's Elbow Saskatchewan keep their savings in the local bank, but the local bank in Elk's Elbow is a branch of the Bank of Halifax.
Because the bank is national it can move money around and, because the branch in Elk's Elbow is small, the local manager has not much authority. When a businessman in Elk's Elbow needs a big loan, the local branch can't help him.
To get a big loan a businessman from Elk's Elbow has to go to the bank's head office in Toronto but the vice president there doesn't want to take a chance on some small business way off in Saskatchewan. The bank can use the Elk's Elbow deposits in Toronto and if someone in Elk's Elbow wants to start a business, he can come to Toronto to do it.
The fact that the best investment might be in Elk's Elbow is irrelevant. The bank's officers are in Toronto and they find it hard to conceive of any business, other than logging, mining or oil, that could prosper outside a big city.
Because big city businessmen have access to the banks they can also take over businesses in outlying areas. The Elk's Elbow Eclectic Eggbeater Co. is in fact a good business but, because it's located in Elk's Elbow, it can't borrow the money it needs to expand.
Enter Torontosaurus Corp, a conglomerate that already owes the Bank of Halifax several hundred million dollars. Torontosaurus knows the Elk's Elbow business is good and -- partly because it's already in hock to the bank -- it can borrow enough money to buy EEEE and to finance the expansion.
And Torontosaurus may build the new EEEE factory in Taiwan. If the people of Elk's Elbow had been able to keep their money in a local bank they could also have kept the town's leading industry, but national banks tend to channel everything to national centers.
Now Canadian banks are taking the next step. Having grown rich by funneling the savings of small town Canadians into big cities they are moving into the global market to lend Canadian capital to foreign businessmen who will use it to open mines and build factories to put Canadians out of work, and to buy Canadian assets that Canadians can no longer afford.
The banks call this "progress" but the people of Canada might have another word for it.
FREE MONEY
In the modern world Canadian banks found a bonanza in the end of deposit banking and, again, their gain is the economy's loss.
In the old days we used to keep our savings in banks, and the banks paid us interest on our deposits. They had to pay interest because they needed reserves.
Banks have always been able to lend more money than they actually had but in the past they had to have some money of their own. American banks are not allowed to make any loans at all if they do not have money on deposit in a Federal Reserve Bank.[5]
But since July of 1994 Canada has used a "zero average system" under which banks don't have to keep deposit reserves. They have to maintain accounts in the Bank of Canada but they don't have to keep any money in those accounts. The theory is that they deposit when they can and withdraw when they need money but they don't have to actually keep money there, they just have to maintain an average balance of zero in the account.[6]
If they have a reasonable cash flow, in other words, they don't have to have any money at all. Banks have always been able to "create" money but in a reserve system they must have seed capital of their own to make it from. In a zero-average system, they can make money from thin air.
And they make billions of dollars of it. In fact most of Canada's national debt is imaginary money created from nothing by Canadian banks, and that's a sore point with Paul Hellyer.
He was a cabinet minister in one of Trudeau's governments, perhaps best known as the man who merged our three armed forces into one. In 1969 he resigned from Trudeau's cabinet over a matter of principle.
Hellyer points out that while private banks can create money the Bank of Canada can also create money -- and that the Canadian people don't have to pay interest on money created by the Bank of Canada.
Most of the national debt is compound interest on borrowed money, Hellyer says, but if the money had been borrowed from the Bank of Canada the interest -- now about $85,000 a minute -- would be payable to the government of Canada.
The Bank of Canada did not have enough money to finance the federal government but neither did the private banks. They created imagined money to loan to the government, and the Bank of Canada could have done the same.
In the spring of 1993 Hellyer hired Infometrica Ltd, an Ottawa-based economics firm, to calculate the effect on the Canadian economy if the federal government had adopted and maintained the incomes policy that he had recommended in 1969. A computer simulation of the economy showed that if the policy had been adopted in 1978 we would have had an extra 870,000 jobs and $50 to $80 billion less debt in 1985. Extrapolation of the same scenario to 1992 showed a saving of about $220 billion in the federal debt.[7]
The banks' ability to create their own is a real problem for Canadians who want to save money, because banks that can create their own money don't have to pay interest on savings. Why should they rent your money when they can create their own money for nothing?
But because banks don't pay interest on savings, people who keep their savings in a bank lose money to inflation. That's why most of us are driven to the stock market and to mutual funds in order to save for our old age.
That's a problem for a couple of reasons. One is that most of us don't have time to research investments properly. Back in Gooblegoo banker Jack Lender knew the local market and he could take the time to study Joe Miller and his proposal, but most of us know very little about the stocks we invest in.
If the local newspaper and my friendly stockbroker both tell me that Brea-X is developing a huge gold mine in Indonesia I have no way to check on it, and I may invest a significant portion of my life savings in that mine.[8]
The two things I know for sure about Brea-X are that someone was paid to write the newspaper and magazine stories about it, and that whether the stock goes up or down my broker will collect a commission for selling it to me.
Now, of course, we know that Brea-X was a swindle. In theory the agents of the stock brokerage that underwrote Brea-X checked it out first but it's obvious that if they were not part of the swindle, they must have been incompetent. Canadian law does not hold them responsible but the facts remain that they made profits, and that people who trusted them lost money. Some lost their life savings.
If a company like Brea-X had to borrow money from a bank, the bank would make sure there was gold in the ground before it approved the loan. The stockbroker's agents who inspected the mine did not have to make a thorough inspection because the brokerage did not plan to invest its own money and, even though the mine was a fraud, the brokerage still collected a commission on the stock it sold. It would be a bad idea for a brokerage to float too many frauds but, as long as it doesn't lose its reputation, a fraud can be as profitable as a real mine.
The stock market is a dangerous place for an individual investor. I can buy some protection against crooks and other investment traps by putting my money into a mutual fund, but that creates other problems.
MUTUAL FUNDS
If I can't spare the time or don't have the expertise to watch the market carefully it makes sense for me to join a group of investors with a hired manager to handle my money. It seems that a lot of people think that way because Canadian mutual funds held about $34.6 billion worth of stocks and securities in 1991, and in 1998 they held over $286 billion.[9]
But mutual funds are highly-competitive multi-billion dollar corporations in their own right, and the only standard they have for success is to get the highest possible return on their money. That's a problem because mutual funds are so very big that they can afford to invest only in very big companies.
If a fund has $5 billion to invest, for example, it can't afford to buy stock in a company that is worth only $5 million. Because the fund is just investing, not taking over, it does not want to buy more than 10% of any given company and 10% of $5 million is $500,000. That's only one-tenth of one percent of the total value of the fund, and the fund can't afford to research and track holdings that small. Even $5 million -- 10% of a $50 million company -- would be only one percent of the fund total and too small for efficient management.
So a multi-billion dollar fund wants to invest in very big companies -- with total worth in the hundreds of millions or in billions of dollars -- and that creates another problem because very big companies can't grow very fast. A million-dollar company might legitimately double or triple it's value in a year but a multi-billion dollar company can not. The price of the stock might double, but it's most unlikely that the real value of the company would increase that much.
But mutual funds need growth and the only way they can get it out of the very big companies they buy into is by encouraging managers of those companies to work for short-term profits rather than long-term value. It's not impossible to get both but it is unlikely and hot-shot "turn-around experts who move from company to company know they can produce better short-term profits if they skimp on long-term plans.
The easy way to increase the profits of a company is to gut it. If you shut down research and development, cut back on customer service and use cheaper materials the profits go up for a while. The company itself will go down in a few years but that's no problem to a manager who can move on to another company before the results of his work show.
When a corporate rape-artist moves in the profits go up, for a while, and the price of the stock goes up with them. When the rape-artist moves on the insiders know it's time to sell, and leave the suckers holding the empty shell of what was once a solid and profitable company.
In a world in which speculators and profiteers are seen as respectable citizens, this kind of rapacity is seen as good business practice.
The perfect scenario for the mutual fund manager is to buy into a company just before a corporate rape-artist takes over, and sell just before he leaves. If he serves his own and his clients' best interest, the mutual fund manager is a predator on the economy and an enemy of society.
On a small scale, tens of thousands of individuals try to get rich by gambling on the stock market. Most "day traders" will probably lose in the end but a few can and do make considerable fortunes by speculating on futures, buying on margin or selling short. These are all legal gambits and they are considered respectable but they add nothing to the economy and the people who make their living that way are essentially parasites.
Like banks, stock markets began with a valid function but they have outgrown that function and now they probably do more harm than good.
There is no question that companies need money to go into business and that they may need more money to expand. People want to invest their money, and the stock market gives them a place to do it.
But the stock market does not help start-ups of small companies. People who actually start companies get their money from savings, or by borrowing. When a company is doing very well it may "go public" on the stock market to raise money for expansion, but honest development of that type represents a very small share of the stock market's business. Almost all of the action on the stock market is the buying and selling of stocks of established companies.
Even when the market launches a "new issue" it is usually an established private company going public or a new venture by an established company.
Because they list big corporations and not small companies stock markets steer investments toward big companies and away from small ones, and away from wannabe businessmen who need money to get started.
There is an obvious need for a mechanism to help inventors and small businessmen raise money to develop new ideas, but the stock market is not it. Rather than help inventors and small businessmen to build something the market helps promoters raise money to buy and destroy small businesses, and large companies to automate and get rid of their employees.
"Venture capitalists" and banks may offer to back small business but the offer may be a hollow one. Banks like to bet on a sure thing, and a business plan may be a sure thing because it contains no new ideas. Any half-decent businessman who can raise a small down payment and get a franchise for a big-name hamburger stand can get backing from a bank, but a genius with a new idea can not.
I remember news stories about the arrival of one of the major hamburger chains in Canada, many years ago. A company that was already big got a $500 million line of credit to open a chain of restaurants based on an American franchise. The newspapers thought that was good news, but I had questions.
One was the thought that if I had $500 million to work with -- worth more than $1 billion today -- I think I might be able to develop my own recipe for a hamburger. One advantage would be that if the recipe was Canadian, the profits could stay in Canada. Because the big company chose to buy an American franchise, they had to send a share of their profits to the States.
The other problem with that deal was that it established another chain of me-too American spin-offs in Canada, and made it harder for an real entrepreneur to open a Canadian restaurant. The big company that bought the franchise and the bank that backed it may have made a profit, but the Canadian economy lost. As it happens we lost even more because the Canadian company that took the franchise didn't run it very well and the American owners took the franchise back.
Another problem with the stock market is that most of the money gained or lost on stocks does not represent real wealth. When stocks go up the dollar value of the paper increases but the increased price does not represent real value. Like other imagined money stock market profits are valid if they are used to produce new capital goods, but if they are used in any other way they will cause inflation. Most of the people who make their living in the stock market do not use their profits to create new capital goods.
Some stock gains reflect expected growth. If a company has a new product or a big contract investors may expect it to grow and they may then bid up the price of the stock to the value they think it will reach in the future. That makes sense for the investors but their profits are still imagined money and, because the company will still have to borrow money to finance the actual growth, the imagined money created by the increase in the price of the stock is not balanced by an increase in real wealth.
There is more money, but there is no increase in real wealth. If money is a token that represents wealth the ultimate effect of a rise in the stock market is a decline in the value of money.
Even if the stock market did no real harm it would be a problem because it lures thousands of capable men and women into work that does not produce real wealth. People who trade stocks may make big profits for themselves but, for the most part, they are more likely to destroy real wealth for the economy than to create it.
LAWYERS
Modern lawyers are more genteel than the highway robbers and mercenary guards of earlier days but many of them perform similar functions. Like the robber barons of old some lawyers set up shop on the highways of commerce and collect tribute from all who do business. As in earlier times if you refuse tribute you risk attack and robbery by another lawyer, or perhaps by your own lawyer now working for someone else.
Other lawyers operate like highwaymen, using the courts as weapons of robbery. When a friend of mine rear-ended another car on the Don Valley Parkway a few years ago there was no damage to either car, and no-one was hurt. My friend and the other driver agreed that nothing had happened.
But it seems the other driver had second thoughts because my friend later learned that her insurance company paid more than $40,000 in damages for that accident. Her agent explained that even though there were no actual damages the plaintiffs were represented by a lawyer who specializes in suing insurance companies. The insurance industry has learned from sad experience that it may be cheaper to pay off even an obviously fabricated lawsuit than to fight it.
It's even possible that the people who collected "damages" from my friend's "accident" were not involved. The New York Transit Authority often finds that when a bus is involved in an accident the claims out-number the seating capacity of the bus.
People who see or hear about the accident may say they were on the bus and register claims. In one famous case 32 people registered claims after an accident in which the bus involved was out of service and carried no passengers.[10]
Fake claims are so common that transit authorities have a name -- "ghost riders" -- for people who claim to have been on a transit vehicle involved in an accident and another -- "runners" -- for the shills who listen on police radio frequencies for reports of transit accidents, and who go to the scene to distribute lawyers' brochures. If the runners get to the scene in time, they can be ghost riders themselves.
So-called "honest" lawyers deplore frauds but they profit too, because honest people have to hire a defense against frauds. As in the old days, the man who defends you against a robber may be the robber himself in a different guise.
Predatory lawyers and phony lawsuits can even destroy big companies. In the spring of 1995 American lawyers forced the multi-billion-dollar Dow Corning company into bankruptcy.[11] About one percent of Dow Corning's total business was the production of about 750,000 jelly-like breast implants for women who had lost a breast to disease or who just wanted to look better.
But in January of 1992 the U.S. Food and Drug Administration imposed a moratorium on the use of the implants. Lawyers across the country smelled blood, and some advertised in local newspapers to find women who had implants and who might be persuaded to file claims against Dow Corning.
The company was not worried because it carried more than $250 million insurance, but hundreds of thousands of women filed claims saying the silicone breast implants caused illnesses such as rheumatoid arthritis and auto immune disease.
In fact tests by the Mayo Clinic and other reliable medical facilities found that women with breast implants have the same incidence of diseases as women without implants but, with 750,000 implants in use, a lot of women with implants also have diseases. Lawyers encouraged any woman with an implant and a disease to blame the disease on the implant.
And the truth is no defense against lawyers. It would have been so expensive to fight the cases that Dow Corning offered a "global" settlement of $105,000 to $1.4 million to each claimant, depending on her health and age.
That would have cost the company more than $4 billion but it would have limited the lawyers' take and many of them urged women to continue their lawsuits. One Houston lawyer pursued more than 1,000 settlements outside the global settlement.
In May of 1995, after a federal judge said the $4.2 billion that Dow Corning had committed to settle the claims would not be enough, the company filed for voluntary bankruptcy.
The breast implants were a tiny part of the business and the company offered them only as a public service. Nobody ever proved that any of the implants harmed anyone but a business worth billions of dollars was destroyed. The lawyers who did the damage made millions, and their gains are recorded as a contribution gross domestic product of the United States.
In 1997 some lawyers attacked the huge Dow Chemical Corp., on the grounds that it owned part of Dow Corning.[12] It's hard to imagine that they could do serious harm to Dow Chemical but it was hard to imagine that they could ever hurt Dow Corning. All we know for sure is that they can do billions of dollars damage to the American economy, they will probably make millions for themselves, and that their work will show as a gain to the gross domestic product of the United States.
Some lawyers pretend to be white knights who protect the defenseless, but many court cases work out better for the lawyers than for the people they pretend to represent.
In January of 1993 ABC Television's 20/20 public affairs show tracked some of the lawsuits that destroyed the multi billion dollar Johns Manville Corporation and six other companies that made products that included asbestos.[13]
This is not an exact parallel to the Dow case because there is solid evidence that asbestos does cause health problems, and evidence that some companies continued to use asbestos after they knew of the problems.
But still, the defendants paid millions for their mistake and most of the money was collected by lawyers. Most of the 500,000 people who sued for damages got only a few thousand dollars each, but the lawyers who orchestrated the lawsuits got millions.
And some innocent companies were destroyed. Keene Corp has more than 4,000 employees making hundreds of assorted products but it made the mistake of buying a small company that had once made asbestos ceiling tiles.
The company cost $8 million to buy and the litigation over a product it did not even make when Keene bought it cost more than $530 million. Plaintiffs got about $210 million of the settlement, and lawyers collected about $350 million.
Lawyers do well out of lawsuits but the rest of us pay. In an ABC news special "The Trouble With Lawyers" first broadcast Jan 2 of 1996, reporter John Stossel says that several American lawyers make more than $10 million a year and the best-paid lawyer in the US received more than $90 million in fees in 1996.[14]
That's good business for the lawyers but it's hard on their victims and -- one way or another -- we are all their victims. Lawsuits for "slip and fall" accidents cost the city of New York about $200 million a year, and Stossel says the cost of lawsuits and insurance add $100 to the price of the average football helmet, $500 to the price of a car and about $3,000 to the price of heart pacemaker.
My examples are American, because there is more information available on American lawyers. American media has studied the problem of lawyers and Canadian media has not. One Canadian example I have is based on personal experience.
In the Toronto co-op where I live, a personality conflict in one committee escalated into a legal process that cost the co-operative several thousand dollars.
A former member of the committee, who was a lawyer, decided to threaten other members with a lawsuit. She told the co-op manager that the decision to sue cost her nothing, because the lawyer who launched the suit for her did it as a "professional courtesy."
But because she chose to sue, other members of the committee might have had to hire lawyers to defend themselves. Because the suit was so obviously unfair, and because some of the committee members could not afford to hire lawyers, the co-op paid its own lawyer to answer the first lawyers' letter and the suit was dropped.
But then the member-lawyer wanted "mediation." That would normally be free, through a federation of co-operatives but, because the trouble-maker was a lawyer, it cost the co-op $500. It seems that any case that involves a lawyer creates special problems, and the mediation center charges extra to cover them.
By the time it was over several people had been subject to considerable tension for several months and the co-operative had to pay several thousand dollars because of the lawyer/member's spite. That didn't please the lawyer/member either, because she had intended to attack her victims personally.
There was no judge, no jury and no trial but, because she was mad at some of her neighbors she thought she should be able to saddle them with thousands of dollars in legal bills at no cost or even serious inconvenience to herself. If the co-op had not stepped in some of her victims would have had to incur debts they could not afford.
Every economy has some predators and some are useful. A healthy economy can afford the useful predators and even a few that are not, but every economy has a limit because all predators live on their prey. When there are too many predators the prey will be wiped out and the predators will starve.
Over the past 40 years we have seen a rapid growth in the number of predators in the Canadian economy, and a decrease in the number of the producers who support us all.
We have survived the increase in predators because we started with a rich country, but the balance has been destroyed. Our economy is failing now, and unless the balance between predators and prey can be re-established, there is no hope for it.
We try to control physical predators. If a mugger robs someone in a back alley, if a burglar robs a house or a gunman holds up a bank, we demand that the police hunt him down.
But our culture does not even try to control financial predators. We have some laws to protect one speculator from another, but no laws to protect a victim from a speculator or to protect the general public from predatory lawyers.
If we count only the numbers, predatory businesses look good. Because predators demand high wages predatory businesses move a lot of money, and the results look good in the Numbers Game.
But the numbers do not represent real wealth, and they don't contribute to the general welfare.
Because there are predators in the world we need tame predators on our side, but their job is to protect us from the predators outside. When our government allows predation within our own economy, we all lose.
Forward to Aristotle's authority
back to Andy Turnbull's web page