Doug Casey on Corruption

(Interviewed by Louis James, Editor, International Speculator)

This interview was first published on February 9, 2011

Editor’s Note: With the U.S. presidential election coming up, corruption will be a big topic in the news. The typical American thinks it’s the government's job to stamp corruption out of society. Casey Research founder Doug Casey has a much different take...

Louis James: Doug, one of the complaints Egyptians have of the rulers they are showing to the door is corruption. It's the same in Tunisia. It seems that more than the lack of freedom or even the secret police, it's government corruption that bothers citizens the most. This fits with your concern that ousting the old bosses will just lead to new bosses who will be every bit as bad; these people don't want to get rid of their governments, they want those governments to work. And yet, I've heard you speak of making corruption your friend. Can you tell us what you mean by that?

Doug: Sure. As always, the place to start is with a definition. This is critical, because people use terms like corruption in nebulous ways that enable sloppy thinking. Unless you can define precisely what a word means, you literally can't know what you're talking about. That's one reason why listening to commentators like Hannity, Beck, and O'Reilly is such a frustrating waste of time. These people are constantly conflating concepts, like the idea of America with the reality of the U.S., or confusing capitalism with fascism, or war with defense, because precise definitions often get in the way of emotive rhetoric.

L: My Webster's says corruption is,

A: Impairment of integrity, virtue, or moral principle.

B: Decay, decomposition.

C: Inducement to wrong by improper or unlawful means (bribery).

D: A departure from the original or what is pure or correct.

Doug: Yes, I looked it up too, and those definitions are accurate as far as they go. But they don't get to the heart of corruption, its essence, and why people hate it, even while it is often a necessary thing. A more meaningful definition (certainly when it comes to political corruption) is, a betrayal of a trust for personal gain.

L: Hmmm…Yes, that makes sense to me. Corruption is not just bribery of officials, though that's the context we started with. It's a bigger idea, and the "personal gain" angle is important.

Doug: Sure. One can find corruption within corporations, as when directors betray their duty to the shareholders for personal gain. Or churches, as when priests, for pleasure, betray the trust of the young people under their guidance. Even a parent can be corrupt, if he fritters away on high living money needed to feed his kids. But those types of corruption stem from personal weakness and personal vices. They're horrible…but corruption in government is much worse.

Only government can impose its will on you by law and back it up with a gun. And with other sources of corruption you can (theoretically, at least) go to the government for redress. But when the government is corrupt, it's hard to get the state's right hand to cut off its left. Not only that, but government, partly because its essence is force, concentrates corruption and incubates it. If a company or church is corrupt, one can quit them. But most citizens are stuck with their government, and they'll probably keep paying taxes to it regardless of their feelings toward it. A discussion about corruption is necessarily a discussion about government as an institution.

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L: Because government officials have power that can make or break fortunes. And that creates incentives among those on the receiving end of state power to try to sway it to their advantage.

Doug: As Tacitus said in the second century A.D., "The more corrupt the state, the more numerous the laws." It's absolutely predictable that as all these governments around the world, and I mean all of them, respond to the ongoing crisis with an ever-accelerating onslaught of new laws, there will be more and more corruption, and frustration with that corruption.

Tacitus was right. But he could just as accurately have said, "The more numerous the laws, the more corrupt the state," because lots of laws engender lots of corruption. In other words, corruption isn't the problem. The state and its laws are the problem, to which corruption is an unsavory and unaesthetic, but necessary, solution. Laws create corruption, and corruption engenders laws.

Every time a legislature convenes, they pass more and more laws. That's all they do, all day long. So the body of laws and the accompanying volumes of administrative regulations and procedures to implement them is constantly growing the whole world over. Legislatures are horrible and dangerous things that bring out the absolute worst in the people who inhabit them.

Laws and regulations are like barnacles on a ship. They keep growing and growing, weighing the ship down, slowing it down. If they aren't scraped off from time to time, they will threaten the ship's structural integrity.

L: Tacitus also said: "The desire for safety stands against every great and noble enterprise." No matter how many times I see it, it always astounds me how the more things change, the more they remain the same. That's really just another way to say that there is such a thing as human nature.

At any rate, the reason corruption results from the proliferation of laws may not be clear to all our readers. Consider the Internet: it interprets censorship as damage and automatically routes around it. The market interprets government regulation as a hindrance and seeks ways around it. Private regulation, in contrast, is a selling point, as when electronics have the UL (Underwriters Laboratories) seal of approval. The proliferation of laws increases the incentive to circumvent the law, and circumventing the law, in this context, is corruption.

Doug: My thoughts exactly. A law is passed because it seems like a good idea at the time, at least for some groups of people who approve of it…anti-pornography laws, for example. But it doesn't seem like a good idea to people who like pornography, or even most normal people these days, who don't think human sexuality is inherently evil. Meanwhile, the people whose preferred choices just got made illegal aren't going to change their views because the government passed a law. So they find ways to work around the law.

Consumers then become small-time outlaws, and providers become "organized crime." What does organized crime do? Generally, they try to bribe the people at the cutting edge of applying the law: the police, prosecutors, judges, inspectors, politicians, etc. It's one reason why vice cops, along with drug cops, are notoriously the most corrupt among police.

L: What about anti-corruption laws?

Doug: Stupid. In the literal sense of the word, meaning unwittingly self-destructive. Those laws necessarily have the opposite effect of what's intended. By raising the stakes, they just raise the level of bribery required, resulting in even more severe corruption. Like everything governments do, it's not just the wrong thing to do, but the exact opposite of the right thing to do.

L: Which is…to reduce the number of laws and regulations.

Doug: Exactly. The only way to fight official corruption is to reduce the amount of legal control of officials, particularly their regulatory power over the economy. If there were no government regulators, inspectors, assessors, auditors, and so forth ad nauseam, there'd be no reason for businesses and consumers to bribe them to get the hell out of the way.

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L: I can hear some people now crying in horror, "But that would be anarchy!" I know your answer to that is: "Good!" But to keep this conversation a little more constructive, let's remind people that government regulation is not the only kind of regulation there is; and, of all forces interacting in the marketplace, it is almost certainly the least efficient and most likely to produce unintended consequences.

Doug: Yes. There are many market forces that regulate business activity and, more broadly, cultural forces that regulate interactions between people. In the marketplace, reputation is a very powerful force. So is competition. And so is liability: it's a powerful negative incentive. More broadly, culture is a very powerful regulatory force, which is to say, peer pressure, moral opprobrium, and social approbation restrain people from being naughty far more than fear of police does. And there are also private institutions that have powerful regulatory influences, such as churches, Rotary, Lions Clubs, and the like.

L: Not to mention private companies that sell regulatory services, like Underwriters Laboratories for electronics; various rating agencies, like Consumer Reports; or the numerous magazines, news columns, and blogs that comment on every product, practice, and notion under the sun. But people who trust UL to certify that their toaster won't electrocute them can't seem to see a similar agency doing the same thing for meat inspection. And they gasp at the very notion of a private agency regulating, say, pollution.

Doug: I've never heard of an instance of corruption with UL or Consumer Reports. But government agencies are rife with it…plus incompetence, as a bonus. People somehow imagine that because government regulations are backed with the iron fist of the law, they work better, especially when the matter is considered vital. This is simply incorrect. It shows ignorance of history and of the state of the world today.

Government regulation usually becomes so corrupt that it ends up doing the opposite of its intended effect. A business that pays officials to look the other way can do even worse things than it would do if there were no officials, because the official seal of approval falsely tells the people that all is well. That's why the SEC should be called the "Swindler's Encouragement Commission," because it lulls investors, especially the novices, into feeling they're protected.

Even when that doesn't happen, government regulations' inefficiencies and unintended consequences still result in having the opposite of their intended effects. For example, when the Endangered Species Act prompts landowners in the U.S. to kill anything endangered they find on their property before anyone can see it, so they don't get their property seized.

It is precisely because some things are so critical that the government should never be trusted with them. Universally, in every country and in every culture, it invites corruption and makes things worse than they would be under private regulatory arrangements and a more vigilant populace.

Strict regulation leads naïve people to think, "Everything is under control." That has two important effects. One, it makes them irresponsible: a belief that they don't have to concern themselves. That general attitude then permeates the society. Two, regulation always creates distortions in the market. It's like a lid on a pressure cooker. Everything looks under control until the whole thing blows up.

That's what lies at the root of the concept of "black swan"-type unexpected events in politics and economics. The black swan lands when the amount of corruption necessary to evade laws becomes as onerous as the laws themselves.

Egypt, and the whole Muslim world, is terminally corrupt. Their governments are scams that serve no purpose but to enrich officialdom. Those worthies, though they collect salaries, mainly take bribes for an income.

But if there wasn't corruption to work around the laws, every one of those places would be totally impossible to live in. So it's actually a paradox. Corruption in government is a bad thing in that it unjustly enriches officials who are betraying a trust. But it's also a good and necessary thing, in that without it nothing would happen at all. It's a shaky arrangement that lasts only until the corruption becomes as bad as the laws themselves. It's like the mercury that was once used to treat syphilis: too much, and it will kill you as surely as the syphilis.

Doug Casey is a multi-millionaire speculator and the founder of Casey Research. He literally wrote the book on profiting during economic turmoil. Doug’s book, Crisis Investing, spent multiple weeks as number one on the New York Times bestsellers list and was the best-selling financial book of 1980. Doug has been a regular guest on national television, including spots on CNN, Merv Griffin, Charlie Rose, Regis Philbin, Phil Donahue, and NBC News.

Doug and his team of analysts write The Casey Report, one of the world’s most respected investment advisories. Each month, The Casey Report provides specific, actionable ideas to help subscribers make money in stocks, bonds, currencies, real estate, and commodities. You can try out The Casey Report risk-free by clicking here.