Capitalism in Crisis Again (Not)

Beans

I imagine we all think that what the world needs is a conference on the topic of Inclusive Capitalism, a jolly beanfest of the world’s great and the good dedicated to discussing how to renew trust in capitalism.  Even better to hold it in London, where the dreadful consequences and devastating effects of the last financial crisis are plain for all to see in the proliferation of designer retail outlets, the high rise growth of iconic skyscrapers and the influx of the world’s billionaire elite seeking democratic boltholes. 

But let’s face it, you couldn't get the world’s top brains to attend a conference in downtown Mogadishu could you? Although, frankly, that might provide them with a better perspective on the pros and cons of capitalism.

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Born Rich, Born Greedy

Recidivists of the World Divided

Research suggests that the upper classes are more morally ambivalent than the rest of us. Or, to put it more bluntly, they’re a thieving bunch of recidivists with the ethical inclinations of a polecat in a henhouse.

Adam Smith predicted this years ago, and skewered the argument that many make in favour of predatory capitalism – that self-interest is the best way to allocate capital. A little enlightenment may come in useful for those wanting to debate the issue.

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When Incentives Go Bad

Strings Attached: Untangling the Ethics of Incentives by Ruth W. Grant

Way back in ’76, when heels were high, flares were wide and hair was long (for the men, at least) a couple of dudes called Michael Jensen and William Meckling proposed a solution to a problem that had vexed even the founders of economics. They attempted to resolve a puzzle that started with Adam Smith and which has ended in the crash to end all crashes; and as ever we’re looking at a set of consequences which was unforeseeable in advance but seems inevitable in retrospect.

The problem was how do you align the interests of the owners of corporations – the shareholders – with those of the managers of the companies? The solution was ingenious, but the chain of events it set off has exposed the nature of the concept of incentives. Because, it turns out, incentives are not neutral economic things, but strike at the very heart of what it means to be human.

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A Lollapalooza Effect – Capitalism & The Death of Wang Yue

Morality and Cuture

Wang Yue, a two-year old Chinese girl, has died after she was run down in the street, then run over again as the driver made off, then ignored by eighteen passers-by and a collection of market traders while she lay injured, before being hit again by another driver who also drove away before, finally, someone pulled her to safety. These events, caught on video by a security camera, have started a furious debate in China over whether the pursuit of profit has destroyed the country’s morality.

More likely, though, is that we’re seeing what happens when multiple behavioural effects combine in the same direction to create a lollapalooza cascade of otherwise inexplicable behavior. For while we may have basic moral principles these can be set aside if our culture encourages us so to do and, if that culture actually provides incentives for us to do so, what you get is children left to die in the street while people walk by.

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de Tocqueville: Trust in Self-Interest

And I assure you that all the peoples and populations who are subject to his rule are perfectly willing to accept these papers in payment, since wherever they go they pay in the same currency, whether for goods or for pearls or precious stones or gold or silver. With these pieces of paper they can buy anything and pay for anything.
 

(The Travels of Marco Polo)

A Culture of Trust

When thirteenth century Western travellers reached the Chinese border they were forced to exchange their precious bags of gold and silver for apparently worthless paper notes. This created a certain amount of angst amongst the traders which was relieved only when, as Marco Polo recounted, they discovered that their paper was happily accepted by merchants within China, was backed by hard currency redeemable on request, was easily exchanged, easily transported and thus promoted commerce.

These exchanges encapsulate the nature and importance of trust, and the difficulties of establishing trust between different cultures. Why would you trust paper money if you’d never seen it before? Underlying this, though, is a deeper question: how can trust thrive if we’re all self-interested egotists, as modern economics expects?

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Is Self-Interest Self-Fulfilling?

Vicious or Virtuous?

By report and repute our planet has become a less pleasant place over the last hundred years. We’re wealthier and healthier – well, at least in some parts of the world – but this doesn’t seem to have made us any happier. Certainly the world of work is a harsher place, where people are no longer socially attached to their places of employment but a rather viewed as resources to be disposed of as and when required.

One line of argument suggests that this change is not simply due to increased economic pressures on people and corporations to get results but is because managers have learned – been trained – to behave in accordance with the principles of economics, founded on the dubious idea of self-interest. When we act on the basis of ideas these become self-fulfilling. Vicious circle or virtuous ladder?

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Studying Economics Makes You Mean

Not Predictable

It’s established by now that economics didn’t help stop some of the more spectacular misadventures of the financial community but it’s a bit less obvious that it was directly responsible for many of the mishaps. It’s all tied up with the dirty fact that economists are basically a bunch of untrustworthy, deceitful bums who shouldn’t be left alone with your child’s piggybank, let alone the world’s economy.

The trouble is that economists have a world-view that sees us all as self-interested moneygrubbers without an ethical thought in our heads. Perhaps that’s because that’s a pretty good description of economists themselves: they act like their models are true, the dirty rotten scoundrels.

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On Incentives, Agency and Aqueducts

Risk Management, Roman Style

There’s an aqueduct in Segovia, in Spain, that’s stood the test of time. A lot of water has flowed over that bridge … two thousand years worth, more or less, since it was built by the Roman Empire. Back then risk management consisted of getting the chief engineer to stand underneath the structure when they removed the supports: now that’s a proper incentive.

Incentives stand at the heart of a lot of human behaviour in corporations but financial theorists have had a great deal of difficulty in understanding that an incentive is not necessarily the same as a financial reward. Although the ideas of psychologists and sociologists are slowly seeping through there’s still a long way to go before there’s a proper appreciation of what motivates people. In the meantime we’re stuck with Agency Theory, the sheer power of grim self-interest: it’s like real life but not as we know it.

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