Harland Prechel has written a very important book about capitalism and financial fraud. The title: Normalized Financial Wrongdoing: How Re-regulating Markets Created Risks and Fostered Inequality (Stanford, 2021) is a little bit of a misnomer. This is not a book about how re-regulating markets creates financial wrongdoing. Yes, in this book, markets get re-regulated and major financial fraud occurs. However, markets also get de-regulated and major financial fraud occurs. And the regulatory regime stays the same for a while - but crooked lawyers and financiers get shrewder and cleverer. Major financial fraud occurs.

The book is a panoramic display of the vast landscape of financial chicanery that has characterized American capitalism since the era of the Robber Barons. We think of the Robber Barons as a phenomenon of the 1870’s and 1880’s. The Robber Barons never left. All that has changed is the personnel -- who exactly the Robber Barons are today. What has also changed are the precise laws and accounting conventions that get to be twisted. The result however is always the same. The Robber Barons siphon off colossal sums from unsuspecting investors. If an angle presents itself, the Robber Barons siphon off colossal sums from the Federal Government. And if any of these scams goes seriously awry, Wall Street and the American economy crash. The financiers generally survive with much of their fortunes intact. The American middle classes and working classes get wiped out. Regular people lose their jobs, lose their savings and lose their homes.

At the most superficial level, the book can be read as An Encyclopedia of Complicated and Questionable Financial Schemes. These schemes really happened. They enriched their perpetrators and wiped out thousands and millions of other people. It is good to know the details of how just how these schemes worked.

If you read the book this way, bring coffee to the table before you get started. You are going to have to pay attention to detail. You will lose the thread of the argument if you skim. Fraudulent financial schemes are by intention complex. They are designed to fool other financiers, those financiers’ lawyers and accountants, the investing public, and government regulators. This is not three-card monte. It is three-hundred-card monte. There are a lot of hands manipulating cards, and sleight of hand is occurring at every stage. Plus you are being lied to at every stage about the state of the cards.

However, Prechel is into bigger game than just showing off a vast display of complicated frauds. He is making a larger argument about capitalism as a whole. He is attacking the idea that capitalism is based upon free markets and that government intervention prevents free markets from being fully efficient. He invokes the classic Polanyi argument that all markets are embedded in a web of profound social relationships which includes the state and law. This is a traditional argument in economic sociology. It is used to explain the role of the state in creating money, and the role of the state in providing the legal framework that produces the trust necessary to have secure market relationships.

Prechel’s contribution is to show how vulnerable the market-making function of the state is to predation by powerful elites. The usual stereotype of a Polanyi-esque argument is cruel and savage capitalists using a socially constructed market to undermine the institutions of trust and mutuality that insure the quality of life. Prechel invokes cruel and savage financiers and lawyers who undercut the government institutions and market structures that make capitalist economic growth possible.

Prechel argues that capitalists and lawyers use obscure, poorly understood aspects of the law to create economic arrangements that hide or obscure critical information from one party in the deal. In some cases, there is simple fraud, where one party actively misrepresents the state of reality. In other cases, critical information is simply omitted from the reports. In all of these cases, what allows the financier to get away with misdirection is that the legal arrangements are new, complex and poorly understood. The victim is drowning in information on dozens of complex points – matters which the victim is learning about for the first time. Tucked away in there may be a highly unfavorable clause, expressed in such a way that its implications are not clear. In the flood of information, there may be missing information - but who the heck notices with all this other text to read? And often, because the lawyers have constructed the deal carefully – everything that the financier has done is fully and completely legal, with little legal recourse for the victim. Normally institutional economists argue that rule of law is good for economic growth and healthy robust financial institutions. Prechel shows that law can be dangerous when used by skilled operators with an intention to deceive.

A more subtle theme that is woven into Prechel’s argument is that elites use their ideological power to both perpetuate their frauds and weaken government regulation. Their ability to attract willing victims for their schemes is that they are rich, they are successful and they are innovative. Everyone wants to hear their secrets for making money. They have a lot of moral capital in business affairs which makes investors eager to throw their money into new “unprecedented” economic opportunities. This same ability to tell a good story goes to their sociological and economic arguments about why they should not be taxed or regulated. Whether they devise new and appealing laissez-faire arguments themselves, or they borrow them from academic or political allies who are sympathetic to their case, they come armed with a formidable battery of sophisticated ideas that sound progressive and reasonable when argued in front of judges, regulators, legislators, the press or the public.

It takes intellectual sophistication to fight off these sophistries. This is an important function of Prechel’s book. Claims that what is good for finance is good for the world are made over and over again in the public forum. When these arguments call for a weakened role of government regulation or when these arguments call for the toleration of new and poorly understood financial instruments - is when people need to get suspicious.

Prechel calls for a broad society-wide coalition to oppose the self-interested actions of the super-rich. My guess is that such a coalition will not come together any time soon. In that case, the only real defenses against normalized financial wrongdoing are:

a. investors that are savvy enough to be suspicious of new and un-transparent financial vehicles and

b. courts, prosecutors and regulators who refuse to relax their due diligence.

Investors and regulators are educated enough to be members of the reading public.

They should all be reading Harland Prechel’s book.