Thoughts on the Financial Crisis

There are bigger ‘philosophical’ issues at stake than the systemic issues affecting the financial system. One important issue that receives little discussion within the mainstream media is ‘productivity’, and how little the global financial system, as currently organized, is concerned with maximizing human productivity and creativity. This is not a trival issue, as in fact the entire purpose of economics should be to deploy resources in the most effective way to enable and facilitate human productivity and creativity.

In her books ‘Mad Money’ and ‘Casino Capitalism’ Susan Strange (1925-1998), former Professor of Economics at Warwick University, describes the degeneration of the global financial system. As late as the 1970’s, 80% of transactions in the financial markets were concerned with actual investment, and only 20% with speculation. However, by the 1990’s the ratio had flipped, with 80% of transactions being merely speculative, and only 20% concerned with actual investment.

As an example of a merely speculative transaction, consider a hedge fund such as Long Term Capital Management (LTCM) which failed in 1998, precipitating a financial crisis. Its ‘investments’ consisted of a myriad of transactions designed to exploit minor differences in asset prices around the world, a practice known as ‘arbitrage‘. If a particular bond or security was selling a penny cheaper in Tokyo than New York then LTCM would try to exploit this difference. Although such transactions may be profitable, they are in every other respect completely useless. They are not genuine ‘investment’ in any sense. They do nothing to direct the world’s resources towards ‘production’.

The global financial markets are awash with such types of meaningless transactions. Money is racing around the world, crossing borders, fleeing across fibre-optic cables at the speed of light, solely in order to generate profits. Currency speculation is an obvious example. Neo-conservatism has deregulated international capital flows, while on the other hand the movement of people between countries is restricted (very tightly in the case of people from poor countries who want to move to rich ones. No such barriers for their money or resources). Minor tweaks to this speculative system, such as the Tobin Tax which would impose a tiny tax on currency trades, have been resisted.

The measures which we are seeing goverments adopt in the face of the current financial crisis, such as the Paulson plan in the US or the nationalization of Northern Rock and Bradford & Bingley in the UK, do nothing to address the real issue that the global financial system is fundamentally wrong and immoral, failing to direct resources where they are needed, in fact the opposite. These measures are designed merely to get the existing financial system back on its feet so that it can continue with ‘business as usual’.

What is needed of course is a sane economic system which puts people before profits. Although this may sound radical it is in fact very simple and sensible, as in fact nobody at all — not even one person — is benefitting from the system as it currently stands. Some may protest that mega-rich hedge fund traders (‘hedgies’) are benefitting, but an academic study of hedgies reveals this not to be the case. Commenting on this study psychologist Oliver James writes that the hedgies

had high levels of depersonalisation (feeling detached from one’s surroundings) and a staggering two-thirds were depressed. There were similarly high levels of anxiety and sleeplessness. The more they earned, the more likely they were to have these problems. Twice daily, they consumed both alcohol and an illegal substance (mostly cocaine). For relaxation, they chose solitary pursuits: jogging, masturbation and fishing were common.

For anyone familiar with sane theories of economics, such as the work of E. F. Schumacher or Erich Fromm, these findings are not surprising. The exercise of our productive and creative talents is at the heart of being human, and merely pushing money around in the pursuit of profit is not productive and does not contribute to human welfare. Just like an assembly line worker or a fast food server, hedgies are likely to suffer from ‘alienation’. Observing workers in the automobile industry in the 1940’s, Peter Drucker wrote:

For the great majority of automobile workers, the only meaning of the job is in the pay check, not in anything connected with the work or the product. Work appears as something unnatural, a disagreeable, meaningless and stultifying condition of getting the pay check, devoid of dignity as well as of importance. No wonder that this puts a premium on slovenly work, on slowdowns, and on other tricks to get the same pay with less work. No wonder that this results in an unhappy and discontented worker — because a pay check is not enough to base one’s self-respect on. (‘Concept of the Corporation’, The John Day Company, New York, 1946, p179, quoted ‘The Sane Society’ by Erich Fromm)

The syndrome of alienation that Drucker describes is common whether we are at the top, middle or bottom of the current economic pile. On the other hand, if the nature of work is properly appreciated and applied

it will stand in the same relation to the higher faculties as food is to the physical body. It nourishes and enlivens the higher man and urges him to produce the best he is capable of. It directs his free will along the proper course and disciplines the animal in him into progressive channels. It furnishes an excellent background for man to display his scale of values and develop his personality. (by J. Kumarappa, quoted ‘Buddhist Economics‘ by E. F. Schumacher)

In order to put economics back on track, to make money serve people rather than the other way around, and to help make productive work available for all, it is essential that there should be political will. To a large extent we have been duped into believing that economics is a science which follows natural laws like physics or chemistry, whereas really economics is tightly constrained by the role given to it by politics. The fact that sick economics has taken over is testament to an absence of political will and effort on all of our parts. Governments and citizens now have an opportunity to put that right.

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Posted on October 6, 2008, in Economics, Politics. Bookmark the permalink. 3 Comments.

  1. Well said Matthew,
    Ive spoken to many people who would agree wholeheartedly. I wonder whether we can change? id certainly like to think so
    regards
    Nick

  2. I’m sure that some of us can change a lot, and all of us can change a little. Part of the change of view we all need, to get ourselves out of the neurotic delusion called “the economy” and back into “the world”, is to stop looking for dramatic success. The world doesn’t need saving by a single heroic act. It needs to be inhabited by people who would rather do what is compassionate no matter whether they see amazing results or not – just from a straightforward sense of preference.

  3. The strange development of the modern system will be this. If there comes a time when most of the work is done by machines we will be in an economic system where everyone needs to do jobs to earn money but there are no jobs that need doing. The conbination of this factor and our endless over consuming will mean we will either all have to be given money simply because we exist and watch as our society becomes filled with the mental illnesses that come from feeling no sense of purpose. Or we will have to rebuild the system so it is not the case that people need a increasingly huge amount of money to exist. An animal does not need pieces of metal and paper nor does it need mathematical skills to get food and shelter. The reason why we do is because we have built a system of finance. The fact that our survival is totally dependant on this system & there is no opt out ability (gypsies are the example of trying) means that a huge amount of paper metal & various calculations have to be made before someone can lie down & go to sleep- since where they want to lie down is owned by somebody.
    Either way people will need a sense of purpose or they will make various conflicts to give them a sense of purpose or sink into depression. I myself cant work due to disability & it is easy to slowly go insane.

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