For the last thirty years, the economy has been slowly taken over by [wikipop]pirates[/wikipop], thieves, and terrorists.

The economy – even before we called it that – always had a diverse set of participants. There have always been those who gathered raw materials, those who manufactured things from raw materials, those who traded in things of value and those who financed parts of the process. There have also always been those who made their living by disrupting this otherwise harmonious flow of value, namely: pirates, thieves and terrorists.

Value and Wealth must stay connected

If we go back a few generations – three for me – all these roles were what we would now call vertically integrated. The [wikipop]Quaker[/wikipop] farmers of my ancestry were soloists in the world  of commerce, as most people were back then. They gathered, built, and traded and maintained a keen sense of the market value of things because they lived and died by it. When things are on this simple level you can depend on “market forces” to keep the market players in line. Another way of describing those market forces is to say that wealth (things that represent economic possibilities like having 1 dollar in your pocket or owning something you can sell or use) must move somewhat proportionally to value. If you make something more valuable you see more return.  Defining value can be squishy and fluid – you know this if you are underwater on your mortgage. Lots of factors effect value. During a drought a gallon of water can fetch a better price than during a flood.  The newest iPod that retails for $249 is worth lots more than a new, still in the original packaging iPod that retailed at $249 two years ago. Under the right circumstances you might say “My kingdom for a horse.”The point is that a healthy capitalist economy requires that value and currency flow roughly together.  When they don’t, bad things happen.

If you are a farmer who has just sold your crop at a market, but get robbed on the way home, you no longer have the capital to grow the next crop.  That farmer suffers most, but everyone else does too. Suddenly there is less of that crop in the market place next year.  Costs rise for those who use the crop so funds must be diverted from other things or they buy less of it. If these buyers were making something to sell with that crop they are either making less of that thing, need to charge more for their product, or take less of a profit – the profit that they would use to invest in replacing tools or buying supplies. The ripples flow endlessly.

This is why human societies established law enforcement. Someone needs to stand in the way of these troublemakers or the whole thing falls apart because no one can predict what anything will really be worth.

For me, the economic troublemakers come in three basic flavors: pirates, thieves, and terrorists

Pirates

Pirates, by my definition, are those who absorb value from the flow of value. They position themselves in the path of delivery, real or virtual, and take whatever crosses their path. They obtain wealth from value transitioning from one entity to another. They tend to be indiscriminate of what types of wealth they take. This is a crime of structural opportunity. The ocean is vast, hard to patrol, and there are lots of places to run after the crime.

Thieves

Thieves target specific things that they want to have and take them by whatever means.Thieves obtain wealth from things that are supposed to be someplace in particular. Thieves take things out of cars, houses, and, increasingly often, the public coffers.  If you were to, say, contract with government, caretakers of the public coffers, to provide a service and that service fails to provide any value, then it is thievery.

Terrorists

Terrorists destroy value. Usually they are a proxy for someone else who sees some tangential gain from the destruction. Destroying someone’s business so yours will have less competition – that is an act of terrorism.

How they took over

If capitalism were a religion, piracy, thievery, and acts of terrorism would be sins. Unfortunately, we have confused capitalism and sinful capitalism. We have come to accept immoral activity that generates profit as acceptable, if not laudable, behavior. The truth is, however, that our willingness to accept these behaviors and not make them illegal or regulate against them, have created a randomness to the economy – rewarding all the wrong people far too often.

Pirates, Thieves and Terrorists have always existed in the economy but today they take new forms. In a large, complex, and mostly electronic economy there are lots of places to hide.  If there is no law enforcement in place, pirating or thievery start to look pretty enticing. Particularly pirating, is much easier than trying to create value on your own.

Unfortunately, these forces of economic destruction have grown so large that we have forgotten that they are dark forces instead of the norm.  Market forces cannot impact complex transactions.  The feedback loop that keeps markets efficient doesn’t exist when the buyers and sellers don’t have any access to understanding their choices or feeling the impact of their decisions. We need other players in the market – regulators of some form – to be the arbiters of safe value.