Transparency: Fad Word/Pseudo Remedy

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