Anne Applebaum's recent Slate piece on the Madoff scandal asserts that capitalism relies on trust to operate efficiently. I object to the use of the word "trust" - that implies a relationship between us lowly consumption serfs and our capitalist masters predicated on honesty, transparency, and respect against which I need not bother arguing. But she has a point: even if the system is unfair, it "works" better when everybody can rely on predictable relationships and solid institutions. Fraud - especially on the scale perpetrated by Madoff - undermines our reliance on those status quo relationships, tossing into stark relief how little basis there is for any "trust".
However, given the agent-principle problems inherent in the corporate economy, it's a wonder schemes like this don't blow up more often. Certainly the massive government regulation of the corporate form socializes the costs of maintaining what are in fact complex and opaque delegations of responsibility and liability, as I argued in Let the Free Market Eat the Rich. As participants (and especially as investors) in this general model for organizing business, we don't trust so much as we have faith - blind faith that the variety of parties involved in these firms take their fiduciary and oversight roles seriously.
Left libertarians often talk about the barriers to market entrants that regulations erect, shoring up the positions of big, established competitors. Rarely, however, do we discuss how the regulatory infrastructure makes shareholder-owned, management-directed, employee-operated firms into viable, productive enterprises in the first place. Without limited liability guarantees, laws mandating oversight for managerial decisions, provisions for creative accounting (much of which itself resembles the ponzi scheme), and other legal tools for investors, the shareholder-owned corporation would resemble a classic con job the larger and more complex it became.
In fact, I think the takeaway from the Madoff scandall is that the corporate form is a con job writ large - it's just that the complex organizational dynamics of the firm make it unclear whether one is a "mark" at any given time. Intricate laws require criminals to step up their game, but they also promise a larger take. And let's face it - there is no transparency even with regulation, since the smartest con men can work around even those protections.
Employees, shareholders, and other stakeholders get a false sense of security from the regulatory theater, which is a crucial pillar in the justification for the hyper-centralized economic control inherent in corporatism. The decentralized, crowd-sourced regulation that a genuine free market provides would blow the whistle on the viability of the large scale firm, demonstrating that we actually pay to have economic control concentrated in a few hands. As we see these complex financial schemes drag down the economy even further, one can only hope that the faith shattered by this crash will turn into a renewed emphasis on taking more direct responsibility for our economic security.Read this article