We Are All Madoffs

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image by REUTERS / Jessica Rinaldi

This article is part of a package on rethinking the economy and how to prosper in the wake of the recession. For more, readGet Rich Now,Empire of the Stunned,andWork Plan.

Everybody hates Bernard Madoff, and for good reason. He bilked thousands of people out of billions, perhaps tens of billions, of dollars, destroyed numerous people’s life savings, and ruined the future prospects of many of those who had trusted him, all the while living in ostentatious, and, it is now painfully clear, despicable luxury.

He did all this via what might be the largest Ponzi scheme in history. There is no question that Madoff was a perpetrator and not himself a victim: He was (and presumably still is) highly intelligent and sophisticated in the ways of the financial world. He knew precisely what he was doing, and did it nonetheless. In addition to celebrating his prison sentence, disinterested observers and victims alike therefore found themselves wondering aloud: What was he thinking? Why didn’t he consider his responsibility to his clients, to their future, and even to his own?

As pleasurable as it is to cast stones at genuine villains, let’s pause, since as they say, people in glass houses shouldn’t throw stones. Because the horrifying reality is that in our fundamental relationship to the natural world–which is, after all, the fundamental relationship for everyone–we are all Madoffs.

As we have all read, Ponzi schemes–named after Charles Ponzi, who, before Madoff, was the best-known practitioner of the dark art–are also called pyramid schemes. A relatively small number of initial investors (the pointy tip of the pyramid) get paid off by money received from an ever larger number of subsequent investors, who can, in turn, profit only if there are yet more investors. By this time, the investors can be identified as “suckers,” because their payoff, instead of being founded on solid reality, depends on another round of entrepreneurial artifice.

Modern civilization’s exploitation of the natural environment is not unlike the way Madoff exploited his investors. It is predicated on the illusion that it will always be possible to make future payments owing to yet more exploitation down the road: more suckers, more growth, more GNP, based–as all Ponzi schemes are–on the fraud of “more and more,” with no foreseeable reckoning, and thus the promise of no comeuppance, neither legal nor economic nor ecologic.

Nearly all economic models of “development” rely upon an unsustainable assumption: that the discovery of new resources (or, alternatively, new inputs of capital, technological saviors of one sort or another, and so forth) will always come to our rescue, enabling us to postpone, indefinitely, any final audit.

In turn, and nearly without exception, economies are growth-based, presuming that the future will always bail out the present, thereby making up any deficits accumulated in the past. The basis of borrowing money–as fundamental to modern economies as one can get–is that money itself, properly employed, can be counted upon to expand over time, thereby enabling one to repay the loan, with interest. And, of course, the willingness of lenders to lend depends on their corresponding confidence that the quantity loaned will eventually become greater than if it simply sits around. In short, the presumption is that value can always be added–the Ponzi/Madoff presumption that there will always be more investors.

It may be more than a coincidence that the Madoff fraud unraveled at about the same time as the Great Recession of 2008-09, which revealed a comparable fraud at its core. Both involved unrelenting, self-deluding, unsustainable expansion built upon paper profits and a commitment to keep the music playing lest the participants discover that there aren’t enough chairs.

In his Critique of Judgment, Immanuel Kant stated that human beings would never be able to comprehend the deep details of the living world. “It is absurd,” he wrote, “for men to make any such attempt or to hope that another Newton will arise in the future, who shall make comprehensible by us the production of a blade of grass according to natural laws which no design has ordered.” A few decades later, Darwin emerged as precisely that impossible Newton of grass.

Two centuries after Kant, free-market economists continue to revel in a version of Kant’s error, claiming we will never understand the complexities of markets and will therefore never be able to manage them effectively. They insist we must simply let the market take over, even though, in the words of Adam Smith, each participant “intends only his own gain and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Smith was thinking of social benefit, but his approach has been expanded to include a typically unspoken but widely assumed subordination of ecological costs to presumed economic payoff: Don’t worry, we are told, about exploiting the world ecosystem, unbalancing its capacity to absorb insults–just go, go, go, or, as in the mind-bogglingly inane chant of the McCain-Palin ticket during the 2008 elections, “Drill, baby, drill.”

Although part of my argument is, in fact, a criticism of market–based capitalism, it is not an endorsement of its traditional alternative, communism. In communist countries, production goals typically have replaced profit maximization as the “bottom line,” leading, if anything, to even-more-blinkered thinking and environmental devastation. I recall international meetings during the 1980s, attended by environmentalists from capitalist and communist countries, each naively expecting that the grass would be ecologically greener on the other side of the ideological fence. Under capitalism, it has been said, man exploits man, whereas under communism, it’s the reverse. Either way, the environment is the loser.

The standard response of pro-growth economists–and let’s face it, nearly all economists are pro-growth–is that innovation generates concrete value, producing healthy growth and ultimately compensating for any resource depletion. And to some extent, critics have largely been kept on the defensive by such compensatory innovations as steam engines; internal combustion; nuclear energy; a previously unimagined petroleum economy; chemical, bio-, and nano-engineering; and so forth.

But let’s imagine that, say, tomorrow someone discovers an inexhaustible source of cheap, pollution-free energy. Even that extraordinary advance wouldn’t diminish the fundamental Ponzi nature of economic activity; at most, it would merely reset the time of reckoning, possibly making it even sooner, since with cheap–even free–energy, the exhaustion of other resources would only accelerate.

It is widely assumed that a healthy, clean environment is affordable only when a country’s economy is strong. The reality is precisely the opposite: A strong economy is possible only when the environment on which it depends is healthy and strong. A related reality is that endless growth is literally impossible, just as Ponzi schemes that depend on an endless supply of new subscribers are certain to be unsustainable.

It is easy to point a finger at Charles Ponzi or Bernard Madoff, and even, perhaps, at their victims–much harder to recognize, as Zen master Thich Nhat Hanh has written, that we are all grass snakes, arms merchants, sea pirates. We are also Ponzis and Madoffs who profit from economic schemes that are fundamentally unsustainable and thus, in the deepest sense, frauds. Madoff eventually got 150 years in the slammer and worldwide derision. What’s in store for the rest of us?

David P. Barash is a professor of psychology at the University of Washington. Excerpted from The Chronicle Review (Sept. 4, 2009), a section of The Chronicle of Higher Education dedicated to ideas and culture. Nominated for the 2009 Utne Independent Press Award for best writing.

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