The Dull Compulsion of the Economic (viii)
A series of blog postings by D&S collective member Larry Peterson
(1) Scientists think sea level rise from global warming may be far greater than previously thought.
(2) On the economics profession’s adamant refusal to seriously engage with the crisis.
(5) Nice piece on CDSs and AIG’s collapse. Reminds one of the staggering sums involved.
(6) Private Equity meltdown to turn into “the greatest transfer of ownership from equity owners to creditors in history?”
(7) Will stimulus packages reverse green gains?
(8) Another relatively recent (December) thought-provoking piece on the crisis, by David McNally
(9) Michael Mandel on something of relevance to the last link, the striking developments in the relation of financial to nonfinancial profits in the economy over the last few years.
(10) A bank run on a country: the UK.
(11) Odds are very much against self employment as a means to escape the crisis.
The Use and Abuse of Trust
Last week I wrote a piece about the tendency of economists to speak of the crisis in overly psychological terms, or in a manner that suggests that the crisis is (still) primarily about the confidence of consumers, investors and employers. Accordingly, the implication seems to be that the economy is basically sound at best, once we–somehow–strip even historically high levels of abuse out of it, or that it needs perhaps a serious overhaul at worst, but that in all cases we cannot even think about the establishment of a fundamentally alternative economic system.
This week I saw yet another Nobel-laureate economist weigh in along these lines. But Amartya Sen, in a piece in the New York Review of Books, seems to attempt to finesse this problematic out of existence altogether.
Sen distinguishes himself by stating that looking at the present crisis as one peculiar to capitalism is misleading: capitalism and markets have always relied on independent legal, cultural and ideological supports, and, in this sense, to try to isolate “capitalism” out of the mix, especially in the context of today’s hyper-complex societies, is bound to lead to confusion, particularly of an historical sort:
Underlying this issue is a more basic question: whether capitalism is a term that is of particular use today. The idea of capitalism did in fact have an important role historically, but by now that usefulness may well be fairly exhausted.
Sen then goes on to show how Adam Smith had a far more nuanced view of the role of the market mechanism even in the society of his time, in which markets played a far lesser role than they do today, and suggests that, precisely because of Smith’s extraordinary institutional sensitivity, it behooves us to look to Smith in an attempt to rehabilitate our appreciation for the proper role of markets in society. But then he begins, to me, anyway, a very strange meditation.
First he notes, once again, that capitalism did not emerge until new systems of law and so on, which solidified notions of private property, allowed for economic growth and capital accumulation. And he says, “Profit-oriented capitalism has always drawn upon support from other institutional values.” But then he shifts gears:
The moral and legal obligations and responsibilities associated with transactions have in recent years become much harder to trace, thanks to the rapid development of secondary markets involving derivatives and other financial instruments. A subprime lender who misleads a borrower into taking unwise risks can now pass off the financial assets to third parties—-who are remote from the original transaction. Accountability has been badly undermined, and the need for supervision and regulation has become much stronger.
The insufficient regulation of financial activities has implications not only for illegitimate practices, but also for a tendency toward overspeculation that, as Adam Smith argued, tends to grip many human beings in their breathless search for profits. Smith called the promoters of excessive risk in search of profits “prodigals and projectors”–which is quite a good description of issuers of subprime mortgages over the past few years.
So, even if you accept that the fundamental problematic surrounding the present crisis has more to do with some sort of unchanging psychology of investors (the tendency to get carried away with temptation of excess profits) than the real economic conditions under which investments are made (and which invariably appear in and influence relations between classes), there is a question here. Why was it that the institutional supports that allowed for the spectacular growth of postwar capitalism became so quickly and thoroughly undone from the ‘seventies on? He says, as we have seen, that capitalism has always relied on institutional support from non-market entities and structures, but he fails to explain the extraordinary turn away from such entities and structures during the deregulatory period that followed and went more-or-less unchallenged until last year. So rather than explaining this development, he simply describes it:
And yet the supervisory role of government in the United States in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance grew, the needed supervision shrank. There was, as a result, a disaster waiting to happen, which did eventually happen last year, and this has certainly contributed a great deal to the financial crisis that is plaguing the world today.
But then he makes yet another transition:
The present economic crisis is partly generated by a huge overestimation of the wisdom of market processes, and the crisis is
now being exacerbated by anxiety and lack of trust in the financial market and in businesses in general–responses that have been evident in the market reactions to the sequence of stimulus plans, including the $787 billion plan signed into law in February by the new Obama administration.
Here Sen touches upon something that has really been making the rounds in the financial press these days, namely, the role of trust in market interactions and in capitalist societies. Most commentators I have seen tend to focus, again, on the role of investors in this vein, in speaking of the present crisis. So, to explain things like the pronounced lack of willingness of banks to lend, or of investors to buy into government-sponsored bailout programs, writers focus on the idea that, having been burned so badly already, such people are naturally extremely reluctant to put more money down. But such a situation then leads, inexorably, to further contractions of economic activity. Investors know this. And governments are going to great lengths to make money available to combat this. But takers have been few. So the reason must be an essentially irrational lack of trust. Sen doesn’t actually say this, but I sense in the progression of his argument that this is a key assumption. Sen, like Alan Blinder (see link 3 above), seems to believe that once we sober up, we can, with the aid of governments, sort the mess out and live happily ever after. And despite the huge damage done to the economy, we need more confidence in our leaders, and, presumably, in ourselves, to emerge from the mess.
But the problem here is that Sen looks at trust in exactly the same way he does all the other psychological propensities that influence market behavior: as relatively unchanging constants in stable equations. But the type of trust engendered in the lead up to the crisis was a wholly peculiar one, which was influenced by all sorts of specific factors, many–perhaps to a peculiar degree–of which reflected intensified class dynamics. So, in the period before the crisis in the US, virtually no-one was prepared to imagine that the entire system could melt down with the speed it did. But many noted that the underlying dynamic, of hyper-consumption (as Stephen Roach has noted, US consumption still amounts to some 70% of the economy, down only a percentage point or two from the height of the bubble) aided by copious amounts of credit, but unaccompanied by rises in savings, or wages that came even close to tracking key outlays like those involving education, healthcare and pensions (not to mention lodging or home-finance, which is another story) that were rising out of sight, was dangerously unsustainable. But everyone trusted that, at the end of the day, someone else would take the fall if things fell apart. And this kind of thinking was encouraged by the incentive structures that proliferated from a governmental/business complex that was noteworthy for its venality and conspicuous corruption. And this, almost certainly, had much to do with the kind of degradation of social feeling that was a factor behind, and consequence of wider deregulatory dynamic. “Trust”, under such conditions, far from being the strangely lacking factor behind a partially inexplicable collapse of the financial system, should perhaps be viewed, in the highly skewed from it took on as a result of the severely distorted economic conditions that came to become prevalent in the final years of neoliberalism and deregulation, the Bush years, as a key occasioning cause of it.
After such a denouement, it’s hardly surprising that “trust” is noticibly lacking; but it’s even more unsettling to think that the authorities (many of whom, as we all know too well, like Summers, Geithner et al, were instrumental in conditioning us in the new variant of “trust”) want to revive it.