Organizational Design for Political Settlement of the Risk Proportion

Our economy is designed to assign the macro-risk proportion by political settlement. The assignment (the settlement) occurs by means of quantum, market mechanics directed by a public-private mix of regulatory authority. (See the article, "The Bureaucratic Model of Power and Political Economy" on this web site.)

Remember that where public authority does not regulate, private authority does. When corporates get so big they can dictate the marketplace to a detriment in a too-big-to-fail, economy-of-scale proportion, the market becomes regulated by public authority. The regulated effect is as much to protect the benefit derived from the detriment as to protect the public, resulting in a political settlement rather than a market settlement of the risk proportion.

Both Democrats and Republicans organize to regulate the marketplace.

Republicans contend the marketplace is self-regulating. Entrepreneurs competitively organize to maximize profit and minimize cost and the result is the legitimate (ontological) outcome of indivisible collective action (the general welfare) derived from the bottom up by a divisible (deontological), popular consent. It does not need government regulation (an arbitrary, indivisible deontology) imposed from the top down.

Democrats contend the self-regulatory hypothesis is disconfirnmed and free-market theory is passe'. Successful firms entrepreneurially consolidate to defeat the socio-economic benefit of free markets, causing the need for government.

Which one is it?

Republicans organize to regulate the effectiveness of free markets without government regulation, and Democrats organize to regulate it. So we toggle between regulation and deregulation without the full effect of a free market--freedom! If the role of government is to ensure freedom, this is not the way to do it.

The assumption is that power naturally consolidates (the "iron law of oligarchy")--but only if we let it! It is a soft determinism. We are not necessarily condemned to a tragi-comedy of changing elite authority. Quite the contrary, pluralism is the risk to be fully assumed in priority--it is the risk that the ambition to accumulate power foolishly tries to prevent only to find it cannot be prevented, only avoided by its organized accommodation.

Our founders intended to prevent power from accumulating into the hands of aspiring tyrants. Capital so consolidated that it concentrates into commodity futures to support an inflationary-deflationary trend, for example, allowing speculation to defeat the prospect for organic growth, is the kind of over-extended risk proportion our founders fully intended to prevent. It disfunctionally diminishes the utility of the animal spirit--the prospect, the crisis-preventing productive incentive, to get rich in the pursuit of self-interest (life, liberty, and happiness).

The founders clearly recognized that allowing for a few tyrants (oligarchy) results in even further consolidation of power (monarchy). Consolidation is fully expected to control risk organized to accumulate into a crisis (gamma-risk) proportion (catastrophic, indivisible, over-accumulation of alpha risk, or the risk of loss--the necessary condition for pluralism--fully, endogenously, assumed). Instead of cycling and recycling the crisis proportion to resist pluralism, it is more practical--it makes more sense, it is more "enlightened"--to accommodate the natural tendency to pluralism in priority.

The Constitution provides a system of checks and balances to offset the accumulation of risk. Less for the purpose of providing for the general welfare, it is more to keep the accumulation sustainable. The offset has evolved into the two-party (counter-party) system of political settlement we have today.

The counter-party system allows for continuous extension of the rent (the classic means of deriving and accumulating value, but not without also accumulating an equal proportion of risk). The proportional value of the risk is organized to regulate (to counter) endogenous, pluralistic tendencies that naturally occur when the economic rent gets too high as in the case of the American Revolution.

The Revolution pluralized and redistributed the risk and reward that was consolidated by the monarchy. The value was derived through classic extension of the rent (much like today when wealthy speculators bid commodity futures up, deflating average incomes in zero-sum). Americans did not share the king's divine right to their property and renting its value back to them (much like the rich do today through the cyclical proportion of debt to equity and the "natural" ability to manage, or rent, the accumulated proportion). Americans regarded the extension as taxation without representation (an avoidable accumulation of risk), or as Adam Smith described it, taking the risk and doing the work without enjoying the full value of the reward (resulting in an unavoidable distribution of the risk value re-presenting the retributive value of the accumulation).

When the value becomes fully retributive, warfare is the likely form of political settlement, and we had the Revolutionary War. Today, we find ourselves descriptively engaged in "class warfare" (deciding who legitimately pays the most tax--the rent--with the greatest economic utility). Class warfare indicates a value retributively proportioned, and our Constitution allows it to be civilly organized to prevent it going fully gamma.

Republicans essentially organize to consolidate the value (accumulation), and Democrats organize to limit its extent (distribution). The extent of the risk is regulated to discount the risk of loss fully assumed in the gamma proportion.

It is critical to understand that the gamma risk is the risk that cannot be avoided. Apparently, our founders understood that. They understood there is a level, a dimension, of risk that is fully assumed and unavoidable whether we like it or not. So, it is better to operationalize it, organize and legitimize it, to support the acquisition of property and the demonstration of power like the king, but without the fatal flaw of ignoring the unavoidable risk (not being so arrogantly drunk with power to think you are immune to "the risk").

Combined with public, regulatory authority, the marketplace gains an "exogenous" risk proportion, as Schumpeter, for example, described it. The added cost transforms the dimension of risk proportion.

Politically imposed costs, by compromise or other means of tax and subsidy related or supposedly unrelated to a particular policy space, may or may not accurately reflect the cost of externalities or even accurately identify them. (Following the Great Recession, for example, subsequent regulatory arbitration has been arbitraged in the form of market risk to yield record profits in the face of continuing economic distress. While it is impolitic for regulators and beneficiaries to admit, the profit and the loss is a zero-sum risk proportion--the negative externality expected to be abated by regulatory authority.) The inaccuracies accumulate "econometric errors" to transform the risk into beta-risk volatility (uncertainty--risk to be manipulated and arbitraged). The accumulated uncertainty is then regulated in what I refer to as the "gamma-risk" dimension.

Gamma risk adds cost to the economic rent (the price of economic participation), requiring an economy-of-scale efficiency to control the cost. Organized consolidation to control the cost controls the effect of government regulation so that the liability of the firm is limited to a largely political, rather than an economic, settlement of the risk. Thus, the risk gains its "gamma" (unavoidable, indivisible) proportion, requiring assignment by means of authority. Analysts, then, (and "The Will of The People") are confined to an elitist analytical model for predictive utility (and conformity).

While a practical elitist model operates to yield a predictable conformity, it also accumulates errors since a pluralistic model is typically used to maintain a pluralistic, free-market legitimacy with "stories" concocted to describe and explain the relationship of the risk-to-reward. The distributive assignment of the risk (the offset that hedges the risk) is narrated to suggest a pluralistic legitimacy while maintaining an elitist distribution of the reward.

Although Democrats are supposed to counter Republican policies and programs that support cyclical trends, the counter measures only have the appearance of being counter-cyclical, which would explain why they are never effective. Counter measures have an effectively pluralistic appearance, but tend to support rather than resist the trends they are supposed to counter; and since neither pro-cyclical or counter-cyclical programs trend a stable political settlement, but tend to realignment, there is also the perennial tendency to align both parties to disabuse the appearance of a cyclically disfunctional, counter-party opposition that leaves the risk in a perpetually unsettled proportion.

Notice, for example, how the recent lame-duck bipartisanship produced tax cuts but not spending cuts despite debt being extended to a crisis proportion. Everybody gets a tax cut, and this compromise will supposedly yield the greater good (i.e., Strong Pareto Optimality). The Tea Party element will be subsequently used as a counter party to the risk. Spending will be cut to satisfy the popular demand the Tea Party represents. At the same time, notice how the Fed and Treasury, acting separately but together to abate the crisis proportion of debt, are always quick to deny policy collaboration and swear off inter-agency criticism. This not only allows for exigentical creation of counter-party risk on the economic side, but allows monetizing the risk with a third-party element that directly represents the political risk.

That third party element--the Congress--combined with the regulatory and corporate bureaucracies forms an organizational technology political scientists refer to as the "Iron Triangle." It is a highly structured, integrated operation of business and government organized to counter-party the risk both politically and economically. It not only affords a high level of structured inaccessibility to the processes of power, which are the exclusive domain of the power elite, but adds immense complexity to the analytics associated with the current value of the risk. The proprietary character of the risk dimension and the manageable extent of its political proportion is maintained so that only the properly initiated are qualified for its active management--anything else is just commentary.

The combined, triangulated technology for counter-partying the risk creates a political-economic environment so complex it is difficult to reduce policy and programs to verifiable hypotheses. Instead, public policy is more amenable to compromise--the exigency for creation of counter-party risk. The disposition for compromise supports the demand for debt and the extended value of the risk in the gamma dimension, and the consequences (the cause-effect relationships) are analytically reduced to the errors built into the compromise. The counter parties blame each other for the accumulating crisis proportion, creating a cognitive dissonance that is intentionally organized for binomial, two-party, political resolution in the form of cyclical realignment, driven mostly by the exigency for compromise. Pragmatically disposed, in the meantime, bureaucrats, like the Philosophes of the Enlightenment, independently manage and maintain the technical extension of the risk (the economic risk of default that results in political risk and its settlement by organizational design).

Compromise renders an analytical environment in which causation is reduced to an ideological debate: the recessionary trend and the high unemployment rate, for example, would not persist if partisan values had not been compromised, so the argument goes. (The sum of errors is what Schumpeter refers to as an exogenous, econometric error accumulation, which presents a persistent, exogenous risk that must be managed in a crisis proportion.)

Verifiable measures are reduced to all manner of rhetorical device to support binomially induced tautologies presented as verifiable evidence. We can only, then, "believe" what we cannot verifiably "know," and the issues are safely rendered a function of ideological binomialism while the economy is creatively destroyed in perpetuity.

"Creative-destruction," as Schumpeter described it, is the cyclical dynamic that causes the need for government spending and the extension of debt (the classic extension of the rent). The process is regulated to maintain an "endogenous" legitimacy of the outcome (over-extension of the risk proportion necessitating exogenous, elite management). It appears that by natural process, elite authority, whether public or private, will utltimately determine the extent of the risk and the proportion in which it is to be shared in the form of debt-to-equity (i.e., the ability to survive the cyclical trend without government spending).

Cutting spending increases the demand for debt (and make a special note here that no expense was spared to bail out mortgagers, but programs to support mortgagees are slated to be fully cut, making them counter party to the largest proportion of the risk by regulatory assignment). While cuts verify where the demand (the income) needed to drive our economy is, it will not happen without supporting the deflationary trend and the risk of default, increasing the demand for debt. Since the demand that reduces the risk has been consolidated into the upper-income class as capital formation, but legally defined as proprietary wealth, the risk will not reduce until that wealth is turned back into capital at a rate of interest that causes the risk. If debt is not provided (or the wealth deconsolidated) at the necessary rate of interest (the extent of the political risk), the fundamental legitimacy of the system comes into question (that is, redemption of the retributive value, with the risk of loss fully assumed in the gamma proportion, is more probable).

To avoid redemption of the accumulated value, political risk is settled by positioning a counter party to take the risk. Since avoidance accumulates the value, the result is an economy-of-scale (politically too-big-to-fail) dimension of risk settled in a highly divisible, proprietary proportion. The outcome is supposed to be like buyers and sellers meeting in the marketplace; and since, supposedly, we operate with a free-market legitimacy, the transaction (the offset) has the apparent propriety of offer and acceptance, limiting any risk of liability to a civil jurisprudence and political resolution, if at all.

Determining liability (identifying causal determinants with the intention to do harm) requires examining the risk proportion and its probable, monetized extension. Let's consider, for example, the useful function of small investors being positioned for the risk with virtually no probable reward (with the risk of loss fully assumed).

Professional, institutional investors are apt to take a position based on a counter-party position (with non-elite investors being the most vulnerable of targets). Valuation is largely limited to the position of the counter-party, and it is difficult at best to tenably argue that such a determination is unintentional. Nevertheless, counter-party risk is argued to merely be the naturally assumed, proprietary position of buyers and sellers (bulls and bears) in a free-and-open market. Everyone knowingly and willingly accepts a position and assumes the risk of "taking" that position(?).

If you are big enough to move the market (big enough to borrow massive quantities of "easy" money provided by the Fed, for example), then you have the capacity to determine the value of virtually anything. (Keep in mind that this is no "black swan." It is not a causal determinism occurring by chance alone, but neo-classical innovations creatively applied to deliberately achieve classical, economic results.) Something has value (like the position of a party) just because you buy it, sell it, or hold it. If small investors have a large bond position, for example, going short bonds and long equities positions for counter-party risk. The increased value of equities has less to do with fundamentals and more to do with a "risk-on" proportion to the counter party, which is why small investors, for the most part, have been cashed out.

Small investors invariably try to avoid the risk only to find out it is fully assumed (that there is no "black swan," which is nothing but a statistical invention--a creative interpretation of probability--to scapegoat the liability).

Despite all the new tools available to small investors (which can be easily used to track positions and suggest a probable, technical strategy that assumes the counter-party risk to the reward), they are still significantly disadvantaged. Organizational size alone (the risk proportion) presents a risk advantage which is used to technically (systematically) direct and offset the risk from the reward.

Large-cap firms have privileged access to information networks, which includes access to exchange information, for example, that tracks who owns what and when. Small investors are easily positioned for the risk and elite investors the reward, confirming a practical, class distinction defined by being assumed in a proprietary proportion--the lower the class, the more risk assumed. Even investments that supposedly have no risk, like treasuries, have systemically derived risk because the capital is so consolidated investors can be positioned (commanded) to assume risk by virtue of investment class.

Classification of the assumed risk incurs a liability that must be politically managed and reduces to rhetoric that normatively measures who deserves to win and lose. The concept of "moral hazard" is invoked, for example, to falsely induce a legitimacy that is ethically, rather than empirically, based. Arguing a moral hazard reduces measures to absolute, certain knowledge--immutable moral principles--deductively, rather than inductively, derived to protect hypotheses from disconfirmation.

Normative assessment of the risk serves to protect the reward from probable loss (reclassification, or reassignment, of the risk). If, for example, the legitimacy of an accumulative reward is that it will trickle down to resist unemployment and prevent economic crises, the hypothesis is throughly disconfirmed and the reward (as well as the incentive) is misaligned with the risk. To prevent empirical re-assignment of the risk, it is binomially realigned in a political dimension, organized for its political settlement without changing its inherently unstable (gamma-risk) proportion.

While the empirical measure is an easily detectable zero-sum, the normative measure is that the elite are naturally expected to win and the non-elite to lose. (Philosophers like Ayn Rand argue that while the outcome is normatively valued, that value is empirically verified to be "normal" and thus naturally legitimate, or expected, independant of government form. A free market, free of government intervention, ensures that the very best always have the means of power.)

The only way the command structure (the ability to position the counter party) can politically survive a pluralistic legitimacy is to make it appear that the outcome is ontological and by popular consent, like a free market.

The organizational design we have now is conflated. Democrats busily regulate while Republicans deregulate. Political elements of the system are fused in perpetual, countervailing conflict and the political settlement is a confusing, seemingly uncertain mix of conflationary elements. It is a dynamic process of mutual support in the guise of conflict resolution, and the product is anything but uncertain by design.

Conflated confusion provides fertile ground for elite authority prepared to forge order from the deliberately organized chaos. It is chaos argued to be ontologically determined, of course, (and so we should expect that occasional "black swan" to scapegoat the detriment) derived from pluralistically free and openly fair political AND economic processes.

The redundancy of pluralistic process--political and economic--should protect us from tyranny (and prevent the "black swan" that fails our expectations and results, supposedly, from unintended consequences). If we, for example, see commodity prices rise amid a deflationary trend, the redundancy is not operational. It is functionally fused to yield a highly predictable result deliberately directed in the self-interest of its managers and a clientele of the highest income class. Anyone outside that elite, privileged class suffers a detriment (an assigned risk proportion) that is declared to be ontologically determined and legitimately derived.

Conflation of the processes and its elements gives the system a chaotic and legitimately undirected appearance, but it is deliberately organized to only appear legitimate. The outcome is not really a popularly derived, pluralistic ontology that legitimately resolves a consensual settlement from seemingly undirected chaos.

Organized chaos is a deliberate ruse. Political and economic processes are deliberately fused so that highly structured, predictable outcomes of elite command and control appear to be ontologically legitimate, like a free market.

Proponents of elite power contend the organized machinations of a power elite are but the natural expression of the human, animal spirit. Combined with the ability to anticipate the future, and an imagination for causal determinism, we naturally aspire to command and control it with a predictive, self-interested, self-determined utility.

Selfish pursuit of power is the natural order of things, elite theory argues. It is fused with the natural right--the inevitable occurrence--of the best and the brightest to profitably manage, or legally manipulate, the natural order, organizing to reduce randomness without the assumption of risk that a free market otherwise fully assumes in priority.

Self-interest, conservative philosophy contends, is an irreducible moral standard (a standard measure of reference). It provides the greatest value for the greatest number of people (with the non-elite naturally subordinate and dependent on the generosity of their oppressors, which ultimately results in political settlement and subordination of the risk proportion by means of continuous political realignment).

The process for conflict resolution occurs largely among an elite who bargain for the means to safely keep the value consolidated. Since the value is surplused in the form of private property and conserved with the legitimacy of a free-market ontology (with the risk of loss fully assumed), it is critical to verify that legitimacy and assure it in priority in order to prevent an accumulated, catastrophic, crisis proportion.

Assuring a genuine, free-market resolution in priority reduces the probability of uncivil conflict. Animal spirits can be pluralistically resolved into peaceful and productive prosperity instead of certain incivility.

Instead of protecting the consolidation of power with the certain result of civil instability, like we see now worldwide, it is possible to have peace without sacrificing freedom or prosperity. Subordination to elite authority is not a necessary condition--it is not the inevitable fate of the human condition in the spirit of an animal.

"We the People" are not mere animals. The plurality is not a feral rabble naturally tamed and properly organized by the exploits of a self-seeking or self-righteous power elite.

Pluralism does not inevitably reduce to a subordinated risk proportion that must be managed and settled by elite authority. We will more effectively keep the peace and provide productive incentive without organized consolidation because it is the problem, not the effective solution.

Ivy-League solutions, like we have now, whether from the so-called left or so-called right, are not the only alternative.