In
the recent evolution of fad words and clichés we have already digested,
exhausted, and moved past deregulation, privatization, and restructuring, and
latched onto “transparency” and its close relatives, accountability and
responsibility. If only there had been more transparency in Indonesian (Thai,
Mexican) business and governmental practice we wouldn’t have suffered such
investment excesses and volatility; and correspondingly, if only we can get
those folks to be more open, accountable, and responsible, with honest
supervision, free markets would do the trick quite nicely. It has also
sometimes been claimed that we need more transparency in government, to assure
financial integrity and make the bases of policy open to public awareness and
debate; but government transparency is pressed mainly by liberal reformers,
not by important people, and especially in reference to the areas of defense,
intelligence, and foreign policy the demand for transparency regularly
founders on the rocks of “national security” considerations.
Transparency is a high-falutin’
name for what used to be called “full disclosure,” which was mandated for
securities sold in public markets in the U.S. under the Securities Act of
1934. One of the newly established Securities and Exchange Commission’s
(SEC) main functions under that legislation was enforcement of full disclosure
in corporate financial statements. This legislation came into being because
the Great Depression was attributed in good part to the stock market excesses
of the 1920s, which included minimal information (and much misinformation) to
stockholders, which arguably helped push stock prices to unsustainable levels,
leading to the crash.
Did the transparency
requirements of 1934 solve our problems of stock market excesses and
instability? No, they did not. If we have not had a crash comparable to 1929,
this is more the result of the stabilizing effects of big government, the
Keynesian revolution and more aggressive monetary-fiscal policy, and more
limited credit availability in the stock market. The great crash was fueled by
vast sums borrowed to fund stock purchases—the liquidation of that credit as
the market fell, with limited Fed intervention, contributed greatly to the
long and devastating post-crash decline. There are now “margin
requirements” (required down payments) on borrowing to buy stock, and Fed
policy, even with free market fanatic Alan Greenspan at the helm, responds
aggressively to destabilizing market tendencies. But despite these post-1934
stabilizing factors, we still have had remarkable spurts of stock market
euphoria, during the era of the conglomerate movement (1966- 1969), in the
Reagan-Milken period of junk bond-based mergers and leveraged buyouts
(1981-1986), and in the late Clinton era of furious merger activity and stock
market boom. The current wild inflation of Internet stocks may mark the last
phase of the Clinton era boom. Each of the preceding market inflations came to
a jarring halt, the 1987 downturn almost getting out of hand.
The reasons why
transparency hasn’t solved the instability problem in this country are,
first and foremost, that the investment process under capitalism is cyclical
and volatile, and its fluctuations will always profoundly affect stock market
values. Second, the information supplied even under “full disclosure” is
never complete and full, and there is always uncertainty as to what
information is really relevant to future profitability. Finally, market
operators are influenced in their investment behavior by their expectations of
what other market operators are likely to do. One of Keynes’s oft-cited
observations was that the stock market resembles a beauty contest where the
winner is the one “whose choice most clearly corresponds to the average
preferences of the competitors as a whole,” so that the problem is not to
pick the prettiest but the one “likeliest to catch the fancy of the other
competitors.” This was an important reason why he viewed the stock market as
more like a casino, prone to excess and instability, than like a rational and
efficient marketplace. This is also one of the reasons he felt that systematic
government intervention was needed to prevent and offset the market’s
destabilizing tendencies. It also made him a protectionist; with little faith
that unconstrained capital and trade flows between countries would be
compatible with national efficiency and sovereignty.
Keynes’s view of the
fundamental nature of financial markets has been repeatedly vindicated by both
empirical research (e.g., Robert Shiller, Market Volatility, 1989;
Louis Lowenstein, “Is Speculation ‘The Essential Native Genius of the
Stock Market’?” Columbia Law Review, 1992) and historical
experience. The latest series of financial panics in Russia and East Asia have
been sufficiently compelling demonstration of the herd-like behavioral
tendencies of market participants to cause even important members of the
regulatory elite (World Bank and elsewhere), and their academic consultants,
to urge the use of capital controls to allow states to protect themselves from
destabilizing market forces. The dominant view, however, is still that
financial liberalization should be carried forward, but with more
“transparency.”
And for some, transparency
will arise naturally from market forces themselves. The notion that the
government is needed to force transparency has always been anathema to Chicago
School economists. Markets themselves should do the job, by investors refusing
to invest except at prohibitive risk premiums without adequate information, or
by managers voluntarily providing adequate information to the company’s
owners as part of their function as the stockholders’ agent. One Chicago
School veteran, George Benston, contesting the notion that the meagre
financial information provided investors in the 1920s was inadequate, stated
that: “If management believed that the marginal revenue to the stockholders
as a group would exceed the marginal cost of preparing and supplying the
information, they would disclose their financial and other data.”
(“Required Disclosure and the Stock Market,” American Economic Review,
1973.) This notion that the management was an undeviating servant of all the
stockholders was not only ludicrous in itself, it was in gross conflict with
the view expressed by Chicago School economists during the era of hostile
takeovers (1976-1987) that the frequent managerial opposition to takeover bids
was based on management’s pursuit of their own self-interest.
One of Chicago School
Nobel Prize winner George Stigler’s most cited articles, “The Public
Regulation of Securities Markets,” was designed to prove that the SEC and
required disclosure did nothing useful for securities markets. Here again, the
market can do the job itself, we don’t need government regulation. (One of
this writer’s most pleasurable research experiences at Wharton was a
collaboration with Professor Irwin Friend in which we demonstrated that
Stigler’s proof of the ineffectiveness of the SEC had been based on data
fraud—reexamining only a sample of his data, we found 18 data errors, 17 of
which helped support his case and affected the test results. This was in the
year that Stigler was awarded the Nobel Prize.)
This hostility to
government regulation and faith in markets is hardly confined to the Chicago
School; because this ideology is supported by the monied interests that
dominate markets and have a veto power over policy, we are not likely to get
any reversal of current trends toward liberalization, or even effective moves
toward “transparency,” until further damage and market catastrophes
seriously weakens their power, as it did at the time of the Great Depression.
Do
market operators actually want transparency? The answer is: sometimes to a
limited degree; but often they don’t want it at all and fight it
aggressively. They accepted it to a limited degree in 1934 because after the
stock market crash and revelations of serious market fraud, a system of
government-assured full disclosure was needed to lure investors back by
convincing them that the market was now honest. It was acceptable also because
the disclosure requirement was limited and could be evaded and litigated, and
because sensitive materials could be buried so deep in large, boring documents
that only assiduous diggers could find them. Still, the system was probably a
net benefit to the public and did somewhat constrain business excesses.
But take the case of
investment in Suharto’s Indonesia, where transparency was nil. A 1992 full
page ad placed in the New York Times by Chevron and Texaco was entitled
“Indonesia: a model for economic development,” and other oil companies
were similarly enthused about investment opportunities in Indonesia. This was
a system of massive corruption, bribery, and privileged exploitation of
resources that rested on power, state terror, and secrecy. The Chicago School
notion that the market would force disclosure because it would otherwise exact
a high-risk premium was inapplicable because the system of privilege plus
terror generated extremely high returns to both the terrorists and their
transnational corporate partners, even with a high bribe price of entry.
Secrecy benefited all the partners, as transparency would have disclosed
details of mass murder, exploitation of labor, environmental damage, theft,
and super-high monopolistic rates of return.
From the early 1970s
onward it was recognized that the bribe cost for entry into Indonesia was high
and that the tiny controlling elite was stealing as much as 30 percent of loan
and aid funds. But because it was advantageous to Chevron, Texaco, Mobil, and
several hundred other U.S. and non-U.S. transnational corporations, Indonesia
was given massive aid by a World Bank Lending Group year after year, it was
allowed to occupy East Timor and kill over a quarter of that country’s
inhabitants without response from the “international community,” and
nobody important called for “transparency.” Only in the aftermath of the
fall of the “good genocidist” did the U.S., IMF, and World Bank start to
talk about the need for transparency. The privileged looting of their
principals was momentarily over and the forces of freedom could now call for
proper behavior in another wonderful display of hypocrisy. (The new call for
transparency was also part of a project of forcing that stricken country to
open itself to greater foreign investment.)
Another important set of
illustrations of corporate hostility to transparency can be drawn from the
record of the chemical industry, the industry has furiously opposed
requirements that its members (or government agencies) disclose chemicals they
have put into the environment; and they have long tried to keep research on
chemical damage under their own control to facilitate non-disclosure or
obfuscation sufficient to maintain their freedom to poison. This is an
important case of hostility to transparency because it concerns the right to
override public health considerations; and with the help of government and the
mass media the industry has done a remarkable job of getting that right
normalized.
The struggle for
transparency in government has been an important aspect of the struggle for
democracy itself. Transparency is important to help prevent stealing by
government officials, to make it more difficult for them to engage in backroom
deals with the real special interests (i.e., the business community), and to
provide the citizenry with the informational base to enable them to
participate in government decision-making.
While transparency has
perhaps increased in a century-long perspective, it remains in short supply
and shows signs of regression in the New World Order. Important leaders like
Thatcher and Reagan were openly hostile to and contemptuous of government
openness, and this never hurt their standing with the corporate media. The New
World Order is one in which class income divisions are increasing and elite
domination of policy has become stronger and less compromising. This makes
transparency in government inconvenient; and in fact one of the notable trends
of the past several decades has been the development of institutions and
agreements like the World Trade Organization, the North American Free Trade
Agreement, and the proposed Multilateral Agreement on Investment that are
designed to have decisions carried out by secret bodies unaccountable to
democratic constituencies.
These developments have
moved ahead, and transparency has been set back, because the dominant
corporate-political elite wants limited transparency, and the centralizing
corporate media, who are members of the same power elite, cooperate.
Governments still can keep information important to public understanding
secret and leaders can lie almost without limit. In fact, one of the great
lessons of the Clinton impeachment process is this: leaders can and will lie,
but they should never do it under oath. Z