“Death creates an economy that makes life precious. One of the ways of naming that preciousness is friendship.”
Stanley Hauerwas

The Global Financial Crisis: Greed Ain’t so Good?

Gordon Menzies

  “ … greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.”
                            Gordon Gekko in Wall Street
 
 
Economic Rationalism, Capitalism, Neo liberalism or whatever you want to call it, has had two solid decades of widespread acceptance.

When business is good and unemployment low, we put up with big executive bonuses and stand aside as the economic way of thinking is driven into every aspect of life. Though we might feel squeamish at Oliver Stone’s Wall Street Villain, we are loath to withdraw our tacit support for the economic status quo, especially at the polling booths.

How times can change ...

Pick up a newspaper now, and critics leap from every page. Australian Prime Minister Kevin Rudd, in a speech in St Paul’s Cathedral in London recently described unfettered free markets as having become ‘worshipped as a god.’ ‘We know now that god was false,’ he declared.1  The Global Financial Crisis has created a need for a major re-think about the market and how it is to be regulated.

Australian Prime Minister Kevin Rudd...recently described unfettered free markets as having become ‘worshipped as a god.’ 
 

The recipe for the crisis is now well known. Take a series of low quality (sub-prime) mortgages, slice and dice them into complex financial claims (derivatives). Mix through the global banking system until neither the derivatives nor the risks to the system can be valued, and serve up. The effects of global indigestion are still being felt, and an after dinner tiff about our economic system has erupted.

Some defend our system, even in the teeth of a recession whose effects are shared very unequally. They interpret the crisis as unavoidable bad luck. Every economic system has its sour moments, so the argument goes, but our system delivers better outcomes than the centrally planned monstrosities of the Soviet era.

They point out, correctly, that markets can guide the uncoordinated actions of self interested individuals towards good social outcomes—Adam Smith’s ‘invisible hand’. For example, a failed banana crop requires that bananas be rationed to consumers, and that producers be encouraged to plant more. An increase in the market price of bananas motivates self-interested consumers and producers to that end, without any need for coordination or altruism.2 The supporters of the market system also caution against government intervention. As Ronald Regan famously put it “The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help’”. 

But government debt is rising at its fastest rate since the Second World War while governments bail out their financial sectors and fill in a gap of private spending. Regan’s words—amusing as they are—strike a discordant note.

Another defense of the status quo is a moral one. The so called capitalist bargain justifies inequality, because risk taking and entrepreneurship is a dangerous pastime. Just as no reasonable person would object to a worker in an unstable mine receiving ‘danger money,’ we shouldn’t begrudge a wealth premium to our innovators.

But rising unemployment reminds us that there are many people who have ‘high risk, low return’ work. Are they compensated enough for uncertain employment, and other risks?3   And, governments have blunted the downside risk for those already receiving staggering amounts of danger money.4   Even the pro-business Economist is uneasy:

  … one has to admit that there was something rotten in finance: the basic capitalist bargain, under which genuine risk-takers are allowed to garner huge rewards, seems a poor one if taxpayers are landed with a huge bill for it all.”
The Rich Under Attack, April 2 2009
 

The debate about how to alter the economic system will doubtless continue, but it will do so along two very different lines. One debate will be about putting in place the best rules for the system. This is the legitimate responsibility of governments which will doubtless be exercised in consultation with business leaders, professional academics and the general public.

1. ‘Free markets a false god, says Kevin Rudd’ The Australian, 1st April, 2009.
2. While giving markets their due, it is important to remember that markets don’t always work like this. Two very important problems are information asymmetry (where one party to an exchange knows more than another) and externalities (where the weighing of costs and benefits by decision makers ignore certain side effects, such as greenhouse gas emissions).
3. A low paid US worker who cannot afford health insurance does not receive any danger money.  
4. Between 1947 and 1979 the top 0.1% of American earners were, on average, paid 20 times as much as the bottom 90%, according to the Economic Policy Institute, a think-tank in Washington, DC; by 2006 the ratio had grown to 77 (The Economist More or Less Equal, April 2 2009).

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