When Democracy Fails

There are a number of sacred caws which dominate the minds of most Americans: free market, democracy, progress, capitalism, freedom. Neither of these are bad in themselves, on the contrary, they have produced better fruits compared with their opposites: controlled economy, authoritarianism, stagnation, socialism, social control. The problem is when we make them into sacred caws, into magic words which tend to end any critical argument. We tend to have romantic ideas about these concepts, forgetting that they sometimes crumble in the presence of human weaknesses.

I do not want to go into the theory of any of these concepts, people much more qualified than me have done it. I would like only to describe an episode in my career which illustrate the imperfection of American democracy and free market. I want to apologize in advance if some dates or names are not correct, although the story in its essence is certainly true.

Good times do not last forever

In 1988 I was working as a contractor for the investment firm First Boston, which was bidding for my services and took me away from my previous client, Morgan Stanley. I belonged to a class of software engineers who called themselves consultants and who were in high demand, especially the ones with good experience and superior skills. We were making good money. The average “consultant” was making probably around $600 per day, but that varied based on hours worked and individual consultant abilities. For me it was a great chance. In the first years as a fresh immigrant in United States, having two children, I was convinced that I will never be able to buy a house. Suddenly, after a few months of savings, I was able to put down the money for a down payment on a house.

These “consultants” were good for their clients. The client did not have to pay for medical insurance or other benefits, such as vacation. The client did not invest in their education or training, but just sign a contract and suddenly have a highly skilled engineer who was able to be highly productive from day one. Eventually some successful consultants (and I was one) received offers to joint their clients as full-time employees. In my case I declined the offers, happy with both the good income and the freedom which the consultant status offered me.

At First Boston (later acquired by Credit Swiss) we discovered a competitor: Arthur Andersen, one of the Big Five accounting firms, which also provided computer services. Arthur Andersen placed consultants at First Boston (and at many other large New York banks) in much more lucrative conditions. Among these, Arthur Andersen charged approximately double for each person placed at the bank. A lot of their people were fresh graduates, who were trained at the client site and at client’s expense. This was a very sweet deal, considering that Andersen people were paid only a fraction of what was the client charged, perhaps something like $300 or $400 per day. In other words, we, the independent consultants, were highly skilled individuals in which the client invested nothing, and were paid about the half of the pay for Andersen trainees.

This comparison between us, the independents, and the Andersen people did not result in envy, bad blood, or animosity. We recognize that Andersen has strong muscles, prestige, and influence. Perhaps their management rubbed shoulders with the top bank executives, played golf together or invited them for cruises on private yachts.

The poor man’s sheep

Soon, however, a new situation developed, which would remind one of the “poor man’s sheep” story, in which a rich man who has 100 sheep steals the only sheep of a poor man. Arthur Andersen decided that they can grab extra market share and realize a higher profit if they throw us, independent consultants, out and occupy the whole ground. To accomplish this, they appealed to the democratic process provided by our American system of government. More specific, Andersen lobbied with the New Jersey senator Lautenberg to introduce laws that would prevent us, the independents to continue our business.

The honorable NJ senator introduced a new law which forced the companies who hire contractors for long periods of time to treat them as employees. We have heard of such recent laws (like in the case of Uber) where the intention was to protect the workers. However, this was not the case here. We, contractors, were very happy with our positions. Furthermore, we knew that our clients could not convert us to employees overnight. The consequence of the law was simply that some of us would have lost our contracts and suddenly found ourselves jobless. The new law was engineered such that it did not affect Arthur Andersen. Their people were already employees, and the new law did not apply to them.

The most striking aspect of the new law was its justification, which went as following. Big companies (like Arthur Andersen) have huge overhead – management, accounting, public relations, etc. Independent contractors had no overhead. I was my own accountant, driver, manager. As a result, the argument went, there is an unfair balance. Poor big companies had to spend money on overhead, while we, independents, were overhead free. Unfair! What the argument did not say was the fact that of big companies overhead consisted of private planes and conferences in Hawaii and golf parties in Florida at which they invited senators like Lautenberg. Ultimately competition was considered unfair because we, independents, were productive and inexpensive, while Arthur Andersen was bloated and expensive. The Congress wanted to even the field.

There was an explosion of rage among independent consultants. They even organized a big meeting somewhere in midtown Manhattan and wrote letters and petitions. I was not part of that, not being a social revolutionary by temperament. In the end, the law introduce by Senator Lautenberg was approved by the Congress. I have no statistics, but I am sure that a lot of independents lost their contracts, although maybe not their living, as many were absorbed into full time jobs as employees at various firms.

After the new law took effect, one day a First Boston manager called me in his office and discretely showed me a letter addressed by Arthur Andersen to the management of First Boston. The letter was in fact a threat vailed as advice. It reminded First Boston that if they continue to work with independent consultants (like me) they may be breeching the law. There was however a solution: in its good will, Arthur Andersen was ready to replace the independents with their own people.

A short follow up

Arthur Andersen ceased to be a viable business, after was involved in the Enron scandals in 2002. They helped Enron cheat on their clients and investors. However, some of the Arthur Andersen’s business survived as a new company, Accenture.

From Wikipedia:

The 2005 ruling theoretically left Andersen free to resume operations. However, CNN reported that by then, Andersen was “nearly defunct,” with about 200 employees remaining from a high of 28,000 in 2002. Following the ruling, William Mateja, a former counsel to the Attorney General who had supervised the Andersen appeal, told NPR that he did not believe the government would seek a retrial because “obviously there’s nothing left of Arthur Andersen, and to spend the taxpayers’ money on another prosecution would be just—defy common sense.” Echoing this, United States Chamber of Commerce vice president Stephen Bokat pronounced Andersen “dead,” and said that “there is no putting the company back together. In his post-mortem of the Enron scandal, Conspiracy of Fools, journalist Kurt Eichenwald argued that even if Andersen had escaped the Enron scandal unscathed, it would have likely been brought down by the massive accounting fraud at WorldCom. The WorldCom fraud came to light just days after Andersen was convicted of wrongdoing at Enron.

Senator Lautenberg died in 2013, at the age of 89, after he served a total of 25 years in the Senate.

I received an offer to become full time employee at First Boston, which I gladly accepted. However, my income dropped by a large margin and I and my family had to learn to live with much less.

Some personal conclusions

  1. Big money and strong lobby influence in politics beat both the interests of the many and the rational expectations for fairness.
  2. There is no such thing as pure free market. Various interests are more powerful than the simple principle of competition for the highest good of society.
  3. The best do not always win.

I am neither troubled nor upset because of all these, having a somehow realistic (and pessimistic) view of human nature and society. I cannot change the circumstances, but through all of them try to do what is right and pure and good. The rest is God’s will.

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