When economists first heard Gekko’s now-famous dictum, “Greed is good,” they thought it a crude expression of Adam Smith’s “Invisible Hand”””which is one of history’s great ideas. But in Smith’s vision, greed is socially beneficial only when properly harnessed and channeled. The necessary conditions include, among other things: appropriate incentives (for risk taking, etc.), effective competition, safeguards against exploitation of what economists call “asymmetric information” (as when a deceitful seller unloads junk on an unsuspecting buyer), regulators to enforce the rules and keep participants honest, and””when relevant””protection of taxpayers against pilferage or malfeasance by others. When these conditions fail to hold, greed is not good.
Plainly, they all failed in the financial crisis. Compensation and other types of incentives for risk taking were badly skewed. Corporate boards were asleep at the switch. Opacity reduced effective competition. Financial regulation was shamefully lax. Predators roamed the financial landscape, looting both legally and illegally. And when the Treasury and Federal Reserve rushed in to contain the damage, taxpayers were forced to pay dearly for the mistakes and avarice of others. If you want to know why the public is enraged, that, in a nutshell, is why.
American democracy is alleged to respond to public opinion, and incumbents are quaking in their boots. Yet we stand here in January 2010 with virtually the same legal and regulatory system we had when the crisis struck in the summer of 2007, with only minor changes in Wall Street business practices, and with greed returning big time. That’s both amazing and scary….
I suppose that if we were to tell the public that our financial and economic crisis is related to the crisis in Western spirituality, they would look at us as swivel-eyed fanatics, out of touch with reality. But consider: capitalism, to be healthy depends upon the following:
* a sense of accountability (to shareholders; the electorate; financial analysts, etc)
* honesty (the figures on the balance sheet tell the truth)
* trust (debts will be honored)
* an innate belief in the greater good (personal profit is not pursued at the cost of damage to the community, to society, to the nation)
– what are these if they are not spiritual issues? They relate, do they not, to the weakness in our countries of institutional Christianity and Judaism. These do not hold the financial classes as once they did, giving them a wider context against which to test their judgements. I very much hope for financial reform along the lines suggested in the article, but I fear that without spiritual values the reform will either not arrive or will be so weakened as to be insignificant.
#1 Fr. Tee, there is much good in what you posted. Spiritual values are absent in the current turmol. When I was in law school we covered how the behavior of individuals changed when a business entity became a corporation. Suddenly, things that a sole proprietor or partnership would never do, are routinely done by corporations. Since a corporation is its own entity, I think it’s too easy for the individuals who run the corporation to be numb to the wider consequences of decisions that they make.
The other side of the coin is that in this crisis governments have divorced risk from failure by bailing out companies that should have been allowed to suffer the consequences of their risk-taking. Instead of $1.5 trillion dollars being pumped directly into businesses that made the worst decisions, and still watch these same businesses teeter on the edge, a small portion of that money would have been necessary to simply help create orderly bankruptcy proceedings for the companies, and unemployment, job retraining, and other tools that could have gone directly to the displaced workers.
Rev. Harmon ran a story on here several months ago about the loss of “moral hazard” which has come about by government bailing out companies who had taken on too aggressive risk.
Adam Smith himself assumed the moral background to economics so well outlined by Terry Tee. Remember, he himself held the chair of Moral Philosophy at Edinburgh U., not that of Econ.