by Hugh Burling
The other night I was accused of being a Socialist. In conversation I had pursued the claim that it would be a good idea to encourage ordinary people and high-street banks to make lower-risk investments, such that there would be less risk overall in the system, and that slower growth was a fair price to pay for a steadier market. I made no reference to legal compulsion at any stage. As I understand it, the high-risk investment strategies that were until recently so widespread became so partly due to the popular demand for them. That is, ordinary people wanted higher and higher returns on their savings accounts and their small-scale investments, alongside lower and lower interest charged them on their use of credit cards and borrowing. To meet these demands, win more customers and stay ahead in the finance market, banks (investment, lending and otherwise) encouraged their employees to engage in more sophisticated and risky practices. Some thing or things went wrong and the cards slipped. I beg forgiveness for my primitive understanding and exposition of our financial markets and crisis: I think my comments below will make clear why I don’t take as much interest as some in the minutiae of the operation of our collective greed.
At any rate, the conversation was reduced to the question being asked of me: “Imagining that you trusted the borrower so implicitly that the ‘risk’ of a loan could only be judged as ‘zero’, what would you consider a fair rate of return, when you leant someone your money?”
Once upon a time, the moral engines of our society condemned usury, the lending of money for the lender’s profit. The consequence was the emergence of a complex system of gifting and deviously-worded insurance deals based on bartering. I am no expert on the financial operations of the Knights Templars but I strongly suspect that even their feudal wheelings and dealings were much simpler than usury has become since it was made legal for the majority of the population. We have always had markets and capital. At least, they both seem to go back a long way (see Sean Gabb’s “Market Behaviour in the Ancient World: An Overview of the Debate” (also available as a pdf). Wanting to make a profit from helping other people is probably ‘innate’ to human economic behaviour – at least it is so common that the desire needs to be factored into considering how to motivate people to help each other.
Indeed, the beauty of Capital‘ism’ is that it reveals how a selfish motivation can benefit others. But that beauty does not stem from the selfishness of the motivation. Intellectually (rather than historically or emotionally), we support financial markets because of three truisms: (1) “many people act out of selfish motivations more readily than out of altruistic ones”, (2) “borrowing money is a very efficient way for an individual to be able to begin new enterprises and hence develop new technology, provide more services, and a variety of other things we like to have” and (3) “many incidences of borrowing and lending must occur in order to have all the things we like produced or provided”. Because so many ‘lending transactions’ – the term ‘investment’ assumes that the transaction has a selfish motivation – must be carried out, we need to take account of the selfish motivations of the aforesaid many people. Also because selfish motivations are so popular, we do not expect a majority of entrepreneurs, inventors, artists and so forth to make a living on the feudal basis of patronage (in which they suffered perpetual disadvantage). So what we do is to try and facilitate selfishly motivated lending.
The problem arises when that facilitation changes to expectation, then reliance and finally the inability to imagine that people do, sometimes, want to help other people for reasons other than financial gain, and that alternative motivations are ultimately better, if rarer. This inability leads to a twisting of the truisms. The selfish ‘many’ changes to ‘all’, and usury becomes, in the mind of the public, the only means towards growth rather than merely a very efficient one.
To end the suspense, the answer I gave to the question was “nothing”. If one could spare the money, and one sufficiently trusted the borrower to return it to one before one needed it, there would be no point in one asking for interest. Nothing would have been lost. Of course, the lender would have gained nothing either. My accuser was flabbergasted at the idea of performing a transaction without the aim of capital gain, hence his accusation.
When we advocate a free market, extol the virtues of honest trade and applaud the system which makes the best of our too-often selfish instincts, we must never forget that a compromise is all capitalism is: a compromise with our greed. It is not an ideology, it cannot provide a goal and we should not allow its mathematical doctrines to persuade us that all humans are only ever selfish, simply because we have a clever system for working with the many of us who often are. In short, capitalism is not an ism like the isms that suffix its opponent theories. It is a perpetual jury-rig, not because we once had some pristine, more efficient system or are likely to manufacture a new one, but because we’re basically not good enough to build a proper mast ourselves.
Tags: Blogs, economics, libertarianism, markets, socialism
Very good. I think you were telling me the story of this allegation put against you. Still not entirely sure why it isn’t on the main page though…
“lower-risk investments”
Would these be the lower risk investments that the free market was quite capable of making before government intervention encouraged or forced them not to?:
1. Building societies, those little platoons, encouraged to demutualise by the Thatcher government. Not one building society that demutualised remains.
2. The Community Reinvestment Act in America, which forces lenders to lend mortgages for risky areas that they otherwise wouldn’t have. (CRA threats were also used to simply extort money from banks.)
3. Moral hazard caused by governments propping up banks: banks will be riskier if they believe the government will bail them out if anything goes wrong. E.g. Northern Rock. Good for the US government not bailing out Lehman Brothers, who were 97% leveraged (their assets would only back 3% of their obligations: they were borrowing to bet on a scale which they couldn’t possibly fix if it went wrong).
4. And of course, the biggest one of all, the one that pervades and screws up our entire economy by distorting the information needed for rational decision-making: a government interest rate deliberately set below the natural rate of interest, the rate needed to balance savings and loans. Cheap credit encourages risk. Especially when it’s below the rate of inflation, so that the real rate of interest is negative – that’s really cheap credit. (Also, government inflation of the money supply itself, which drowns out changes of the structure of relative prices with the “noise” of prices rises across the board: this hinders rational decision making.)
What is a recession? It’s the market reallocating resources that have been misallocated to risky or unsound investments (including but not limited to speculative bubbles caused in part by government inflation of the currency and in part by a low interest rate).
Slower growth would indeed be a fair price to pay for a steadier market. The quick growth of the last few years was really “fake” growth, not driven by innovation or capital accumulation. As soon as temporary irrationalism wears off and people realise many investments were unsound, the “growth” inevitably has to collapse back to what state the economy would be in if it had grown slower in the first place.
It’s not necessary to encourage people to act sensibly. It’s merely necessary not to encourage and incentivise them to act unsensibly.
Bring back capitalism!
Yes, exactly those sorts of investments. Bring on the growth of the credit union!
And no, it is, because some people are unwary or ignorant, even wilfully so. I never suggested that government need be the people to do the encouragement: we have a Church, a self-help genre and mass media for that.
Also I tried to imply as strongly as I could that making a profit from lending was not justified in itself, but only justified because a)we need lots of lending and there aren’t lots of charitable lenders and/or b)money-lenders can better provide the service if they can support themselves while devoting their full attention to the lending.
Excellent article. That said, selfishness does appear to be part of the human condition. So, at bottom, capitalism beats socialism et al hands down, because it turns such negative qualities into positives which have a transformative effect for the better in society, by creating the wealth needed in order to enhance our mutual quality of life. Greed really can be good, so long as it is not unrestrained and unrestricted.
I quite agree that capitalism, as commonly understood, is not an ‘ism’ in the same way as the all-encompassing doctrines of Marx, for example. Capitalism as philosophy (rather than a merely useful, efficient and basically fair system of allocating resources, a ‘compromise’ as you put it) is the Objectivism of Ayn Rand, a dangerous and repugnant creed of greed. Last term the Marxist academic Terry Eagleton preached in Trinity Chapel; as might be expected, he characterised capitalism as an intrinsically atheistic, morally blind system which cannot admit the notions of human dignity or solidarity. He was right; but only if by ‘capitalism’ we mean the strictly egomaniacal philosophy of the Randian ideologues.
The Kantian idea that authentically moral actions cannot at the same time be self-serving is an assessment which condemns business activities as amoral at best, and immoral at worst. But there need not necessarily be a conflict between moral behaviour and self-interested behaviour. In principle, moral businesspeople attend to the wellbeing of their customers and appreciate that their own wellbeing is fundamentally connected to the excellence of their work. Economic theory points to the inescapable fallibility of human beings, the best of whom fall short of pursuing the good in every case, suggesting the importance of incentives. The world is not populated by saints who consider the implications of their every action on the common good, and therefore we must consider how people, aggregately, respond to economic opportunities and constraints in order to craft more effective incentives. This should not mean a hesitation about markets, which reward initiative, creativity and virtues such as industry and self-discipline, and provide efficiently for human needs. Unscrupulous agents will always exist in markets, and there is a legitimate role for external authorities to correct for such behaviour (though it is often self-correcting in the market mechanism). But there is no reason to suppose that such unscrupulousness would not also exist in those very authorities. We must therefore choose between two imperfect mechanisms. Above all we should not forget that good businesses make great contributions to the common good of the society in which they operate through wealth creation, work opportunities and efficient employment of the community’s resources.
Nevertheless we must be wary of the weakness of a culture which stoops to the commoditisation of everything and an unsettling extension of the principle of ownership: cf the idea of a market for human bodies, or the legitimisation of infanticide. This is not a fault of markets, but of an extreme materialistic, secularist Weltanschauung whose only rational options are the systems of socialism or Objectivism. A healthy culture sees the goods we consume not as possessing ultimate meaning (to which the truly meaningful family and society are sacrificed) but as supplemental means by which to attain greater goods. The unreflective drive for material comfort for its own sake cannot of itself produce a harmonious society of happy, fulfilled individuals. Undisciplined by wisdom, freedom is squandered. That the government can be the source of such wisdom is an even more preposterous fantasy.
It is clear that free markets have unrivalled potential for raising incomes and improving welfare, that the entrepreneur is essential to social advancement, and that private action in the social sphere is an infinitely commendable activity which is best enabled by competitive markets. It is just as clear that government action is often inefficient, unfair, and crowds out such charity. It is only when we let capitalism become an ‘ism’, or let government assume illegitimate divinity as the final horizon of human existence, that we err and are ultimately disappointed.
It’s great to see so many of you reading the blog at all – last year there were about four of us who did all the posting and commenting!
Exactly Fergus, I was just trying to be brief. But interestingly, slavery and infanticide are undergoing another wave of legitimization even as we speak (as they have been doing since the 60s). The key difference is that those making the case have an irrational aversion to killing or enslaving those children who have been born. There was a rather disturbing piece about the virtues of eugenics in TCS this week – no doubt the first of many journalistic drips which will wear away at the dignity of the disabled and ill. There was also a recent ‘medical ethics’ inquiry into a practice research scientists have brought over from Canada, in which they offer mothers with unwanted pregnancies money to have chemical experiments performed on their children before aborting them. Of course, all medical ethics boards are funded by the hospital they are supposed to examine, putting it in the board members’ vested interests to approve any profitable innovations. I have started rambling.
My point was originally about the extrapolation of our awareness of self-interest to assume it for all people at all times, and how this can result from the reification of theories of capital. Fergus has explained how this attitude can even become so entrenched that it manifests itself in a ‘philosophy’. It is interesting that the only defense Ayn Rand can ever present is to name her theory ‘objectivism’ (rather like naming bad exegesis ‘biblocentrism’ or a democratic epistemology ‘verificationism’), in the hope we assume it’s true.
First of all, I apologise for the rather obscene length of that late night comment. Sadly brevity is not my forte.
“the reification of theories of capital”
Precisely. Small gaps in our thinking can have devastating consequences when taken to their logical conclusion.
I believe you may be right about a new wave of the culture of death. In Scotland one of our politicians recently embarked on something of a crusade in favour of euthenasia. Luxembourg stripped its monarch of veto power over Christmas so that it could pass euthenasia legislation. But Obama’s pledge that the first thing he’d do would be to sign the Freedom of Choice Act (another misnomer) is the most troubling. This goes far beyond any argument over when life begins etc., removing all restrictions before the stage of viability, and invoking the catch-all “health of the mother” thereafter. Even fully developed babies born after a botched abortion would be stripped of protection under this legislation. I see nothing ‘hopeful’ about that.
I am reminded of GK Chesterton’s words a century ago: “The day will come when it will be more offensive to smoke a cigarette than to perform an abortion.”