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William Black

William K. Black was a federal regulator during the Savings and Loan crisis and appears in Michael Moore's 'Capitalism: A Love Story'

October 16th, 2010 4:53 PM

Capitalism Would Have Killed the Chilean Miners: A Reply to Mr. Henninger

One of our family sayings is: "you can't compete with self-parody". Daniel Henninger is the most recent proof of this saying. He authored a column on October 14, 2010 entitled "Capitalism Saved the Miners." Mr. Henninger is an editorial writer/editor for the Wall Street Journal. His essay, of course, was designed to attack President Obama. Mr. Henninger wrote that the rescue of the Chilean miners reflected badly on President Obama's criticism of Republican candidates' views about markets:

"The basic idea is that if we put our blind faith in the market and we let corporations do whatever they want and we leave everybody else to fend for themselves, then America somehow automatically is going to grow and prosper."

Henninger's responded to this quotation from the President:

"Uh, yeah. That's a caricature of the basic idea, but basically that's right. Ask the miners.

If those miners had been trapped a half-mile down like this 25 years ago anywhere on earth, they would be dead. What ... meant the difference between life and death for those men?

Short answer: the Center Rock drill bit.

Longer answer: The Center Rock drill [was] developed by a small company in it for the money, for profit. That's why they innovated down-the-hole hammer drilling. If they make money, they can do more innovation.

This profit = innovation dynamic was everywhere at that Chilean mine."

Well, not really. Let's begin with why the miners needed to be saved. They needed to be saved because the private mine they worked for appears to have been a "control fraud."

In a control fraud the person controlling a seemingly legitimate entity uses it as a "weapon." Our ongoing financial crisis was driven by an epidemic of accounting control fraud, which caused the housing and commercial real estate bubbles to hyper-inflate. Accounting control frauds target creditors and shareholders as their primary victims. Anti-purchaser control frauds maximize profits by defrauding purchasers about quality and/or quantity in order to gain a competitive advantage over honest sellers. George Akerlof described this form of control fraud in his famous 1970 article on "lemons." Anti-purchaser control frauds can maim or kill their victims, e.g., Chinese infant formula frauds. The worst anti-employee control frauds increase profits by avoiding costs that would protect workers from being maimed and killed. Illegal, private Chinese coal mines are the infamous example of this type of control fraud.

We know that the Chilean mine was private, that it had a bad safety record, and that it has been ordered to shut down permanently. The BBC reports that the (strongly conservative) President Pinera promised the people of Chile that: "never again in Chile would people be allowed to work in such inhumane conditions." Reports from Chile stress that the mine violated the law in failing to have a second entrance to the mine (which would have greatly reduced the risk of the miners being trapped by the collapse of a portion of the shaft). Local officials have claimed that the only way the mine owners could have gotten away with such an obvious violation of the safety rules was through bribery of the regulatory officials.

Reports from Chile also state that the mine did not have the required ladder that would have allowed the workers to escape the mine in the immediate aftermath of the collapse through a ventilation shaft that subsequently became inaccessible. The "innovation dynamic" that was "everywhere" in the Chilean mine due to the profit motive also explains why the ladder was not there. To sum it up, the miners wouldn't have had to be rescued but for the perverse incentives of that unregulated capitalism inherently produces (which is what Obama warned about). (The governmentally-owned coal mines in China also have a far better safety record than the private Chinese coal mines.)

Once the mine shaft collapsed in Chile, the private mining company declared that it not only could not pay to rescue the miners -- it could not even pay their wages. The private company threatened to file for bankruptcy. The rescue was paid for by the State-owned mine (i.e., the Chilean government had to bail out the private mine owner to the tune of an estimated rescue cost of $10 to $20 million in order to rescue the miners). A $25 ladder apparently would have prevented the tragedy, but the private owners' profit motive led them to avoid that expense. The Chilean mine had gold and copper ore. Both of those minerals are selling for record prices. This makes the private mining company's failure to provide another exit and a ladder all the more outrageous. Where did the profits go? Capitalism would have left the miners to die. The government paid to rescue the miners.

Mr. Henninger is right to advise that we should "ask the miners" -- because that is exactly what the private mine and Mr. Henninger failed to do. The private mine ignored the miners' warnings about the inadequate safety of the mine. The government of Chile did not listen to the miners' union on safety issues. And the miners' families sued the private mine owners -- blaming them for the collapse that nearly killed them.

When we prevent a corporation from engaging in fraud or endangering its workers we do not harm capitalism, but rather save honest businesses from being driven from the marketplace. Akerlof demonstrated in 1970 -- forty years ago -- that control frauds can produce a "Gresham's" dynamic in which the markets drive ethical firms and professionals out of the marketplace. When cheaters prosper, markets become perverse. Effective regulators serve as the "cops on the beat" that allow honest firms, workers, lenders, investors, consumers, and taxpayers to prosper.

Crossposted from New Deal 2.0.

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