even this ship needs steering

Via Andrew, Felix Salmon pokes holes in a list of necessary reforms from Nassim Taleb:

Taleb’s first principle is that “nothing should ever become too big to fail”. But all economies have too-big-to-fail institutions; they always have, and they always will. Looking at the rest of the list, how on earth do you stop the financial sector from awarding its employees bonuses, or creating complex products? Derivatives are, at heart, bilateral contracts: how can you ban two consenting adults from entering in to such a contract?

But something’s missing here too, right? Yes, Salmon is right, I don’t know how you could prevent that kind of contract, and I’m not sure you’d want to. But remember the ultimate point: these were catastrophically, economy-destroyingly bad contracts, made again and again and again, by a host of actors, across a large industry and with many different lines of investment. And they have come close to running our whole economy off the rails. So why is it weird, to me, for Salmon to now be questioning whether we can discourage these kinds of deals?

Because for years, we’ve been told that we would never have to. The stock response for so long has been that the boys in the back room were geniuses, and more importantly, that capitalism itself would prevent the kind of enormous interconnected risk that has driven us to the edge of economic apocalypse. Too many rational people working for their own best interests, under the constraints of only the profit motive, would prevent the kind of wild risk-taking and lack of basic responsibility that led us here. That was a line enforced by both economic conservatives and neoliberals, and the failure to concede it risked relegating one to the status of anti-capitalist. The markets just wouldn’t let this sort of thing happen.

Now, we’ve walked back from an era of capitalism’s inherent wisdom and self-regulatory power to the point where a blogger at the Financial Times Reuters (fixed) can ask seriously if there is a way to prevent individual capitalist actors from forging private agreements. But have we really walked back far enough? I suppose you could say that what I’ve written so far is merely a banal statement of recent conventional wisdom. What I find myself wondering at, though, is often how little many of the basic perspectives on our democracy and our economic future seem to have changed. You are just as likely to hear about the supreme rationalism of the system and the inherent strength of the competition of the self-interested now as you were before the system ate its own tail. Perhaps more, because many enthusiastic, aggressive capitalists see, in the calls for further regulation and a reevaluation of our commitment to moderation and sense, not the natural and conservative response to a genuine crisis, but the long arm of communism, reaching once again out of its grave, to strangle the hard-working John Galts of the world…. It’s a strange fact of capitalist rhetoric that those who believe most in the system seem to view it as the terribly vulnerable.

To me, the most sensible and pragmatic capitalist is a skeptical capitalist, one who recognizes the enormous power for good in the system but also recognizes that it is ultimately just a patchwork of conventions, laws and mores, cobbled together by disparate people with vastly different aims, and existing always in an uneasy tension. That, to me, is a simple statement of the reality of life, of human systems and their imperfections. It’s not a socialist screed or an endorsement of some sort of anarchistic future. Yet in the context of American political and philosophical conversation of the last decade, it’s tantamount to carrying Mao’s little red book.

We’ve lived through an era filled with belief in a kind of magic, a belief held by many who would consider themselves the most rational among us. This belief held that unlike every other system we’ve ever devised for understanding or moving through the world around us, the capitalist enterprise had within it a kind of perfection. Not that many would be so crude as to say that capitalism had no victims, although occasionally you heard just that from the more rabid of the Ayn Rand crowd. But many have and continue to talk about the great engine of currency exchange and private ownership as a self-regulating, self-repairing vehicle that, left to its own devices, will proceed inexorably closer to security and abundance towards all. Many of the people who believe that, I have to be quick to point out, believe with their whole hearts that economic growth is the real way to bring about lasting improvements in the lives of the most vulnerable and poor. To their credit, those people endorse the views they do because they think it will help the poorest.

But they’ve allowed their great enthusiasm for a worthwhile enterprise to create a lack of discrimination and an inappropriate credulity. They’ve fallen for their own utopianism. Again, very many of them have done so with entirely pure motives and in good faith. They need to evolve, though, we all do, to see that this system works only so far as we force it to work, with cajoling and nudging and, yes, sometimes strong-arming. There is no guarantee that this thing of ours has to take us to greater equality and happiness. Only people can ensure that, and only if they recognize the terrible burden of responsibility that such a powerful and totalizing system as capitalism represents.

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9 thoughts on “even this ship needs steering

  1. Mencius Moldbug has a really kick’n essay up at http://unqualified-reservations.blogspot.com/2009/04/america-zombie-nation.html where he explains that we don’t live in a capitalist system but a Brezhnevian one.

    It’s well worth reading. My take has been (and remains) this: There ain’t no such thing as “too big to fail” in Capitalism. If someone is telling you that this or that company is too big to fail, you aren’t in Capitalism anymore… even if people are telling you “dude, we’re totally capitalists! We’re just capitalists who are too big to fail!”

    The essay paints a pretty interesting picture. Check it out.

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  2. Not much I disagree with, if anything. As far as the question of freedom of contract, my answer is “systemic risk”. Actions deemed rationally individually when exercised collectively can greatly undermine our system. We just saw this phenomenon occur so I don’t understand why Salmon posed the question in the first place. The answer is remarkably simple.

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  3. “As far as the question of freedom of contract, my answer is “systemic risk”.”

    Can I ask the question of who gets to pick the folks in charge of figuring out who gets to make contracts and who doesn’t?

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  4. It’s tricky isn’t it? The basic precept of capitalism – trade – is as natural as anything. Trade is generally good, and when there’s healthy competition then trade can bring goods at fairly low costs while providing decent labor and a living for people. That’s the basic element of trade from since forever ago.

    But in our system that isn’t exactly how it works, because at the heart of our system is the idea that companies should be allowed to get as large as they want and then, should they become so inefficient and bloated that they can no longer function properly, it is the public duty to rescue them – even if their faults were self-manufactured and based largely in near-criminal behavior.

    This is systemic, though. Monopolization is always a bad thing; but I would say that along with modal monopolization of industries (see the finance industry take such enormous precedence over all others) there is also a corporate monopoly of many industries over small business. In essence, there is some equilibrium that is destroyed when companies become so large that they defeat widespread competition – Wal*Mart may have some competition in Target, but the two giants together have almost entirely wiped out local retailers. This isn’t real competition, it’s a farce. The banks were on track to do this as well, and it is only slightly ironic that the Big Banks were in such worse shape than the local banks, though it is very telling.

    In any case, I agree entirely that the faith in the system is a little overboard. I think capitalism can work, but only if we can figure out how to better distribute capital and thus risk…

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  5. My issue is that this very much reminds me of when one hears a discussion about, say, crystal meth and the havoc it wreaks on communities. Do you want *YOUR* kids smoking crystal meth? How about your neighbor’s kids? No one should be smoking crystal meth. We can all agree on that, right?

    And then the next thing you know, there is a television show on one of those networks called “Dallas SWAT”.

    When I attemped to watch Dallas SWAT once, I got furious after about a minute. The narrator was doing his best to make me identify with the poor victims of crime, if not identify with the brave/bold SWAT members.

    But I couldn’t help but think “dude, that could be my door that they’re kicking down.”

    Hearing someone say “As far as the question of freedom of contract, my answer is “systemic risk”.”, my immediate fear is “This will lead to a television show that shows the authorities kicking in doors.”

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  6. Jaybird,

    It won’t lead to that. The courts stopped defending freedom of contract in the 1930’s, but even so, there is nothing that suggest that one’s right to contract should allow someone to incur massive negative externalities that could destablize a system. I’m not fully comfortable making those arguments, but we have very fresh observations of the sorts of things that can happen (i.e. deleveraging).

    I’m not a fan of putting this in the hands of bureaucrats, but I think there’s enough expertise out there to provide enough guidance to make what will be necessary changes. As it is, a lot of investors are already looking to get changes to the rules made.

    Sidebar here: I spoke to a former colleague yesterday who was on the mortgage origination side at a major CMBS shop and his response about the ratings agencies with respect to how people were able to get away with all this stuff was, “we had them by the balls”. In doing so, sellers have destroyed whatever goodwill and trust has been built throughout the years.

    E.D.,

    I don’t how much “modal monopolization” corresponds to my version of how things happened, although the point about “too big to fail” is duly noted.

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  7. Modal monopolies, I suppose, just in the sense that certain industries themselves have become so centralized and at once so much more vital to our economic stability than others – in other words, we’ve allowed our financial industry to play far too great a role in our economy, at least in its current “too big to fail” manifestation.

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