Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy and the Way to Renew Our Broken System
February 10, 2023
The capitalist component of our democratic-capitalist system is corroding the democratic component. Raymond W. Baker explains how this has happened, why it is a problem, and offers some ways to restore balance between the two.
Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy and the Way to Renew Our Broken System by Raymond W. Baker, Berrett-Koehler
Democracy and capitalism are decidedly different propositions. For almost 250 years, however, America has brought them together in a system of democratic capitalism that has changed the world—and been exported, with varying success and alterations, around the world. Despite the contradictions of the two components of the system—democracy pushing us toward greater equality, while capitalism pushes toward (or at least allows some amount of) economic inequality—the marriage of the two has led to astounding levels of social and material progress.
And yet, there can be no doubt today that, as Raymond W. Baker succinctly states in his new book Invisible Trillions, that:
Capitalism has adopted motivations and mechanisms that undermine democracy, concentrate wealth, drive inequality, and empower crime and corruption.
This is a new problem. In America, we’ve been reckoning since our country’s founding with the compromise made to continue chattel slavery as a key component of America’s original economic system. And it has been argued that the United States was not a full democracy until the civil rights movement finally ended Jim Crow laws in the South that prevented African Americans from participation in electoral politics and relegated them to a status of second-class citizens. But democracy remains motivated by the core principles espoused by America’s founders, and has in fact been expanded to those who were left out of our experiment in self-government by the brutal economics of their day.
So, while acknowledging that the problem is ongoing, we do have a new problem on our hands. For the first time since America lit its proverbial “light on the hill,” it seems to be dimming rather than growing stronger. It is being covered up and secreted away by illicit financial flows that produce ever greater levels of economic inequality and undermine democracy here and abroad. We have exported our economic system around the globe to the point that even those countries who are officially opposed to capitalism as an ideology are full and often powerful participants in global capitalism. But democracy has not followed as many had predicted. And capitalism untethered to democracy is a dangerous proposition.
Capitalism and democracy should be equal partners, contributing to prosperity and freedom. Instead, capitalism is buying governments, buying off democracy, and relegating democracy to a lesser status in the partnership. If this continues, it will ultimately defeat the democratic-capitalist system.
There is a line of thought in Dominic Lieven’s 2022 book about emperors in world history, In the Shadow of the Gods, that has stuck with me and may prove relevant here. It is a question about why hereditary monarchy, such an obviously flawed system of government, prevailed throughout the world up until modern times as “by far the most prevalent type of polity in history.” You can find that line of inquiry and the answer in Chapter One of his book. For our purposes here, suffice it to say that while people surely questioned the wisdom of such an arrangement throughout history, ideas about natural law and divine blessing, combined with a fear of the chaos that might ensue in a system without a strong leader backed by a claim to power based on principles of hereditary and divine blessing.
What democracy did was pull political power away from hereditary monarchy and prove that people can govern themselves. What capitalism did was pull economic power away from hereditary monarchy and prove that capital, if invested into new enterprises, could be used to increase wealth exponentially instead of hoarding into the king’s coffers and bestowing it upon more thinly upon a chosen aristocracy.
Capitalism has been wildly successful at pulling people out of poverty and improving living conditions. I don’t believe that capitalism is the only viable economic system. I also believe that it wasn’t communism or socialism, per se, that failed against capitalism so much as it was that authoritarianism lost the Cold War to democracy. The Soviet Union, in the end, wasn’t so much communist in practice as it was a system of political patronage and corruption. And to make it work for those in power, and to perpetuate power, that fact—even if it was obvious and out in the open in many ways—had to be officially kept a secret from the people.
Secrecy contributes to separation, and separation contributes to social disintegration. Capitalism’s financial secrecy system has brought about a fundamental change from the way the world was viewed in the mid-twentieth century.
As Baker sees it, the world used to be split into stable democracies in the northern hemisphere and unstable “developing” countries in the global south. It is, in his words, “now more accurately viewed as a rich-poor divide, with economically privileged elites across the globe distancing from less fortunate masses of humanity.” And as authoritarian regimes have embraced capitalist practices to grow wealth, they have (with the full knowledge and support of Western financial institutions) also needed to find a way to maintain their power. And, as authoritarian regimes have always done, that means funneling money to the top and obfuscating the fact that you’re doing it. And so, instead of authoritarian countries embracing democracy as they entered the free market economy, the free market economy has embraced authoritarian tendencies and become more secretive (meaning both doing things in secret and secreting money away into the coffers of the ruling class), to the point that practices like “anonymous companies, tax havens, secrecy jurisdictions, money laundering techniques, ubiquitous trade manipulation, and more … today are widely utilized by corporations and handle perhaps half of global free market affairs.” As Baker states:
Hiding money has become as material as making money.
The overarching purpose of secrecy mechanisms within capitalism is to drive money from the bottom to the top. Not a single element of the secrecy system is aimed at benefiting the poor. Extreme poverty viewed globally is already being reduced and could in fact be ended. But charity for the poorest is not the same as change for the whole. This book is about change.
The line about charity versus change echoes Anand Giridharadas’s Winners Take All, which Baker references at least once in the book and would make a great addition to any reading list on these topics. I’d also suggest Oliver Bullough’s Butler to the World and Moneyland, Heather McGee’s The Sum of Us, Lev Menand’s The Fed Unbound, Roger Martin’s When More Is Not Better, and a host of others. What all of them prove is that, while it may be profitable for a few in the short term, the direction capitalism is headed in is disastrous to the potential long-term profitability of the system itself. A lack of real transparency and accountability is disastrous to our democracy, and eventually to capitalism itself.
The profit motive is what unleashed money from aristocracy and monarchy. Early capitalists discovered they could become wealthier if they invested money into new enterprises rather than hoarding it and stashing it away or building luxurious palaces and other odes to wealth and opulence. It seems like today’s capitalists have largely forgotten that. It has once again become an extractions scheme aimed at ruling over others and redistributing money upwards. So, here is perhaps the clearest indictment of where capitalism has gone astray:
The social contract simply cannot hold with endlessly rising economic inequality. […] Capitalism increasingly operating behind walls of secrecy undermines democracy endeavoring to guarantee prosperity.
Baker pulls no punches in his view of the worst culprits, unflinchingly writing that “Vladimir Putin is almost certainly the richest crime boss of all time.” But the chapter entitled Complicit Governments that begins looking at Russia concludes with a look at culpability of the United States in “supporting rogue capitalism and, in the process, weakening democracy, both for Americans and others around the world.” He wades into the dark (money) waters of Citizens United and how it “demonstrates capitalism’s now towering dominance over democracy within the two-part democratic-capitalist system.” He goes even deeper to discuss how the IRS has been hollowed out and banking regulations (specifically Glass-Steagall) have been rolled back, creating a shadow banking system, and the issue of regulatory capture. He adds the Tax Cuts and Jobs Act passed in 2017 as another
American influence on international agencies like the United Nations, the World Bank, and the IMF could be brought to bear on the problem of illicit financial flows and finance. And the UN, in Baker’s opinion, deserves praise for its efforts, but because so much of the money flows into—or at least through—wealthier nations like the U.S., monied interests have a vested interest in keeping the current system in place, the agencies that are supposed to ensure global financial stability are often (sometimes or somewhat) at odds with their own mandate—unless global financial stability means keeping poor countries poor and rich countries rich. The OECD is made up of a more elite membership (i.e., wealthier nations) but reaching out to and working with a large number of other nations, it has been the most aggressive and reform minded. There are others, the most well-known being the WTO, that are involved in either aiding or addressing—or sometimes both, in different ways—the issues of financial secrecy.
American democracy has been weakened by the introduction of dark money into campaign finance, and democracy around the world has been weakened by the “decades-long practice of the United States in welcoming dirty money from abroad.”
It is not only democracy that is undermined, however, but our foreign policy and national security. There is but one sentence italicized in the entire book, and it is directed at those who work in these fields:
You have missed the degree to which the capitalist system operating increasingly beyond the rule of law undermines your own efforts to spread the rule of law.
In its current construction, capitalism is making us less prosperous and free. More fundamentally, it is making us less safe. The good news is that there are practical ways we can remedy this while preserving the best aspects of our economic and political system, and Raymond W. Baker’s book can help us chart the course.