Category Archives: Economics

More Thoughts on the Financial Crisis

Another philosophical issue underlying the current financial crisis is the collective inability of our financial institutions to discern value. Lacking discernment they bought huge quantities of complex assets that turned out to be worthless, and now they require the tax-payer to bail them out.

One of the complex financial instruments whose actual value the banks failed to discern is Collateralized Debt Obligations (CDO’s). Sub-prime mortgages were packaged up as CDO’s and bought by the banks, creating the toxicity which the Paulson plan aims to hoover out of the US system, and which is undermining the British banking system so much that it needs to be partially nationalized at a cost of at least £50bn.

Banks were spectacularly unable to discern the actual value of CDO’s, and the risk which attached to them. With the absence of discernment, the herd mentality dominated the financial markets, first in the form of greed as banks bought and sold the toxic assets in great quantities because everyone else was doing it and earning fat bonuses, and now in the form of fear as inter-bank lending has completely dried up, with no bank trusting another.

For me, an interesting analogy is provided by the Australian aboriginal Achilpa tribe. The tribe possesses a sacred pole which connects heaven and earth:

“During their wanderings the Achilpa always carry it with them and choose the direction they are to take by the direction towards which it bends. This allows them, while being continually on the move, to be always in “their world”, and, at the same time, in communication with the sky . . .  For the pole to be broken denotes catastrophe; it is like “the end of the world,” reversion to chaos. Spencer and Gillen [two anthropologists] report than when the pole was broken, the entire clan were in consternation; they wandered about aimlessly for a time, and finally lay on the ground together and waited for death to overtake them.” (from ‘The Sacred and The Profane’, Mircea Eliade, pub. Harcourt Brace (1959))”

The last sentence is an apt description of the current behaviour of financial institutions.

The human race’s unique nature is to be simultaneously in communication with the ground and the sky, earth and heaven. This is the meaning of the Taoist yin-yang symbol, where yin represents earth, yang represents heaven, and the human race’s job is to keep the two in harmony. Another way of saying the same thing is that human beings are composed of spirit and body, and that health and well-being, individually and collectively, come from correctly aligning body to spirit.

To relate such considerations to the financial crisis might invite derision from some quarters, yet it is precisely the correct alignment of spirit and body, heaven and earth, which enables us to discern value in the world. Without a spiritual axis there is no way to discern the beautiful from the ugly, the good from the bad, the valuable from the worthless. Without a spiritual axis all we are left with is the herd mentality: we blindly follow the rest of the herd and when that fails we lie on the ground waiting to die.

If any more proof were needed of financial wheeler-dealers’ inability to discern value or beauty, look at the current success of Damian Hirst, who cannily sold his remaining stock of embalmed sharks while the hedgies still had some money left. Look to the art market for the next set of ‘assets’ to be revealed as worthless, and for the next herd to lie on the ground bleating. Fortunately the tax payer won’t be required to bail them out.

Advertisements

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.

Investing in Religion

There are two basic approaches to stock market investment: fundamental analysis and technical analysis. A fundamental analyst studies individual companies in detail, looking at the quality of their balance sheets, the calibre of their management, the competitiveness of their products etc. Technical analysis, on the other hand, focuses on the performance of companies’ or whole sectors’ share prices in relation to the rest of the market, searching for historical trends that will indicate a good moment to buy or sell.

Fundamental analysis lends itself to true investment, meaning long-term commitment to particular companies, whereas technical analysis can feed short-term speculation. Warren Buffett is one of the best known fundamental analysts, who has built up big, long term positions in companies such as Coca-Cola, Gillette and American Express. His investment vehicle, Berkshire Hathaway, performed poorly during the dotcom era because Mr Buffett does not understand IT, and therefore did not feel he could invest in technology companies based on fundamental analysis; nor would he relax his principles and invest based on technical analysis. However when the dotcom bubble burst Warren Buffett’s star ascended once more, as other investors piled into the traditional companies with proven track records in which Berkshire Hathaway already had large holdings – then seen as safe havens.

The problem with technical analysis as an investment approach is that it can lend itself to sheep-like behaviour. Technical analysis is based on specific principles, and any differences in approach can be subtle, meaning that, at any given time, most technical investors will be moving in the same direction, with slight variation. The sums of money at stake can be huge – measured in the billions – so even small variations can yield gains or losses of millions. Hedge funds try to distinguish themselves from each other through the subtlety of their mathematical algorithms that plot the market’s movements. Where algorithms are well designed, huge profits follow. Where they are badly designed hedge funds can come close to bringing the international finance system to its knees, as in the case of the 1998 crisis caused by the failure of LTCM (http://en.wikipedia.org/wiki/LTCM). However, no algorithms are so well designed that they can withstand all eventualities, despite the pretensions of the ‘masters of the universe’.

Automated trading based on technical analysis is one of the main reasons for volatility in the world’s financial markets. Many trades are no longer discretionary – they are automated, dictated by an investment fund’s computer software (unless of course a rogue trader can bypass controls in the spectacular fashion of Jerome Kerviel at SocGen!). So when one fund starts off-loading shares because its software tells it to, the chances are there will be a dozen other funds whose software is telling them to do the same, leading to exaggerated effects.

“What”, you may be asking, “does all this have to do with religion”? Well, without wanting to stretch the analogy too far, I think there are some useful parallels that can be drawn between investment in stocks and investment in religion. Clearly there are many differences: the currency invested in stocks is money; the currency invested in religion is faith. Unwise investment in stocks can result in you losing your house; unwise investment in religion causes suffering to the soul.

Just as most individual investors in stocks are in no position to engage in a thorough fundamental analysis of the companies they might invest in, most seekers after spiritual truth are in no position to engage in a thorough fundamental analysis of the religions they might choose. Thorough fundamental analysis of a religion and its bearer organizations would require degrees in theology, sociology, and at least one ancient language! (I should point out, of course, that most people in the world do not choose their religion – they are born into it. Choosing your religion is predominantly a modern phenomenon, although not without precedent in the ancient civilizations of India and China amongst others.)

Those of us who find ourselves living in a society which has largely dispensed with its spiritual heritage, but who feel drawn to the spiritual path ourselves, can exercise choice over which spiritual path we follow. However, we work within limits. There is little point in my choosing to be a Zoroastrian while living in Derbyshire, as there are no groups to join, and precious little opportunity to receive teachings or attend ceremonies. And there’s the rub – no matter what fundamental analysis we engage in, and what conclusions we come to, we are constrained by ‘technical’ factors such as where other people in our society are headed. To give another example, I could choose Kum Nye as the form of physical exercise most conducive to my spiritual path, but it is much more sensible for me to choose Hatha Yoga as there are half a dozen classes in my small home town.

This leads onto a very important point about religion, that it is partly (if not largely) about communal experience. One of the great joys of involvement in religion is joining together with others, breaking down barriers, and experiencing the primacy of the group over the individual. If we have a spiritual practice that does not include this communal experience (communion?) we are missing out on a great deal.

What does this mean in practice? Well, it means partly that we should put down the finer tools of fundamental analysis, and look practically at what spiritual paths are available to us where we actually live. I do not mean that if we are strongly drawn to Islam we should become a Christian just because there is no mosque in our area, but I do mean that if we have a preference for Shia Islam we might decide to attend the Sunni mosque instead because the closest Shia one is 300 miles away. Regarding Buddhism, it would seem foolish not to attend a local meditation centre because it is from the ‘wrong’ tradition, if it is the only one available in our area. Conversely, even if we start to become disillusioned with our own tradition, there can still be benefit in continuing to attend its local meditation centre, just to commune for a while.

On a bigger scale, we should not allow ourselves to be pulled out of communion with the rest of our co-religionists because we find that the tradition we have joined is a ‘splinter group’. Even if the fundamental analysis of the splinter group were to be proved right (just as Warren Buffett’s fundamental analysis was proved right at the end of the dotcom era), there are still benefits with going along with the rest of the herd to an extent. Even though dotcom shares were fundamentally flawed they still made money for a few years – years in which Warren Buffett was missing out on profits. If other Buddhists are having a great time, we don’t want to cut ourselves off from them just because we disagree on some fine points of fundamental analysis!

The point of a religion is to be a valid basis in which to invest our faith. It does not need to be perfect, and in fact no religion is (by the mere fact that we are in samsara). We are always going to find faults if we look hard enough. This does not mean we should ignore obvious faults, but it does mean that we should cut some slack for ourselves and others and realize that the benefits of joining in can outweigh the demands of strict religious purity. And if we are happy in our tradition, we shouldn’t worry too much if others don’t like it.

Two Buddhist Approaches to Economics and Development

Buddhist Values: Schumacher
In his essay ‘Buddhist Economics’, E.F (‘Fritz’) Schumacher says

“Right Livelihood is one of the requirements of the Buddha’s Noble Eightfold Path. It is clear, therefore, that there must be such a thing as Buddhist economics.”

The value of human labour is a central element of all economic theories but conventional, materialist economics devalues human labour, seeing it largely as a cost that should be stripped out of the production cycle completely or ‘offshored’ to a cheaper location. Materialist workers themselves often idealize the elimination of their own labour through dreams of winning the lottery so that they never have to work again!

Fritz Schumacher says that on the other hand

“The Buddhist point of view takes the function of work to be at least threefold: to give man a chance to utilise and develop his faculties; to enable him to overcome his egocentredness by joining with other people in a common task; and to bring forth the goods and services needed for a becoming existence.” (my italics).

Under this definition work has value in and of itself; it is not merely a means to an end which should be eliminated if possible.

“It is clear, therefore, that Buddhist economics must be very different from the economics of modern materialism, since the Buddhist sees the essence of civilisation not in a multiplication of wants but in the purification of human character. Character, at the same time, is formed primarily by a man’s work. And work, properly conducted in conditions of human dignity and freedom, blesses those who do it and equally their products.”

Schumacher goes on to say

“While the materialist is mainly interested in goods, the Buddhist is mainly interested in liberation. But Buddhism is ‘The Middle Way’ and therefore in no way antagonistic to physical well-being. It is not wealth that stands in the way of liberation but attachment to wealth; not the enjoyment of pleasurable things but the craving for them. The keynote of Buddhist economics therefore is simplicity and non-violence. . . Simplicity and non-violence are obviously closely related. The optimal pattern of consumption, producing a high degree of human satisfaction by means of a relatively low rate of consumption, allows people to live without great pressure and strain and to fulfill the primary injunction of Buddhist teaching: ‘Cease to do evil, try to do good.’”

Because simplicity and the value of human labor are at the heart of Schumacher’s conception of economics, his strong preference is for technologies which enhance rather than diminish these factors. He distinguishes two types of technology, “one that enhances a man’s skill and power and one that turns the work of man over to a mechanical slave, leaving man in a position of having to serve the slave”. The second type of technology is often the focus of western ‘development’ aid: huge dams or road-building projects for example which displace people from their traditional ways of life and force them into the cities. On the other hand the first type of technology can be termed ‘appropriate technology’ as it enhances people’s traditional ways of life.

Followers of Schumacher have devoted great time and energy to sponsoring the development and deployment of appropriate technologies, embodied in the work of the NGO Practical Action.

Buddhist Terminology: Sarvodaya Shramadana
As well as the core Buddhist values of simplicity and non-violence, the Sarvodaya Shramadana movement in Sri Lanka also utilizes explicitly Buddhist terminology in its economic and development activities.

‘Sarvodaya’ is Sanskrit for ‘the awakening of all’. The movement began in 1958 when, inspired by Gandhian and Buddhist ideals, a high school teacher named A.T. Ariyaratne took a handful of his students and started social work programs in poor, remote villages. Today the movement has spread to over 15,000 towns and villages and is now the largest NGO in Sri Lanka, offering an alternative to the Western industrial model of development. The Sarvodaya movement defines development as

“not necessarily the transfer of technology or foreign aid schemes or steel mills or nuclear plants, but a “waking up” on every level — personal, spiritual, cultural, economic.”

(from Joanna Macy’s essay ‘Sarvodaya: For the Awakening of All’, which can be found on Buddhanet. Subsequent quotations are also sourced from this article.)

“Sri Lanka is a beautiful country with very beautiful people who are beset with the crushing problems endemic now to Third World societies — inflation, joblessness, deforestation, growing poverty, and hunger. In the Sarvodaya experience, Buddhism serves as a resource for social change. It is used to define what development is in terms that are meaningful to the people.”

The awakening of Sarvodaya means

“waking up to the degenerate condition of our village, waking up to work together and harness our energy, waking up to our capacity for compassion and joy and responsibility. The Four Noble Truths are even expressed in these terms, painted with illustrations on the walls of village centers . . . It is not expressed abstractly, but very concretely in terms of repaired roads, de-silted irrigation canals, nutrition programs, and schools . . . On Sarvodaya charts and murals the Four Noble Truths are illustrated with wheels of causation featuring the interrelationship of disease, greed, and apathy, or between nutrition, literacy, ‘metta’, and self-reliance, for example.”

The method for waking up is Shramadana, where ‘dana’ means generosity and ‘shrama’ means human energy. ‘Dana’ is a central Buddhist virtue and what the Sarvodaya Shramadana movement has done is to widen the scope of ‘dana’ and present it not just as alms-giving but as the gift of one’s time, energy, skills, goods, and knowledge to the community. In practical terms the movement offers

“collective work projects which a village chooses and undertakes, such as cutting an access road, digging latrines, roofing the pre-school.”

At the heart of the movement is the practice of the Four Brahmaviharas: (1) love is the loving respect for all beings that liberates you from self-involvement; (2) compassion is getting out there, “digging or dancing, to improve the common lot”; (3) joy is the pleasure found in service; and (4) equanimity keeps you going in spite of criticism and setbacks. The Four Brahmaviharas

“are on the lips of every village organizer and painted on the walls of village centers. Every meeting, whether it is a village gathering or a committee on latrines, begins with two minutes of silence for ‘metta’ meditation, extending loving thoughts to all beings.”

Joanna Macy writes that

“some fellow scholars of Buddhism, whom I had consulted, considered Sarvodaya’s reinterpretation of doctrine — such as in its version of the Four Noble Truths — to be a new-fangled adulteration of Buddhism, lacking doctrinal respectability. To present release from suffering in terms of irrigation, literacy, and marketing cooperatives appears to them to trivialize the Dharma. When I asked very learned Buddhist monks in Sri Lanka what they thought of this recasting of the Four Noble Truths, I did so with the expectation that they, too, would see it as a corruption of the purity of the Buddha’s teachings. Instead, almost invariably, they seemed surprised that a Buddhist would ask such a question — and gave an answer that was like a slight rap on the knuckles: “But it is the same teaching, don’t you see? Whether you put it on the psycho-spiritual plane or on the socio-economic plane, there is suffering and there is cessation of suffering.” In other words, you are not diluting or distorting the Noble Truths by applying them to conditions of physical misery or social conflict. Their truth lies in the contingent nature of suffering, however you view it. Because it has a cause, it can cease. Because it co-dependently arises, it can be overcome.”

She concludes that

“the notion of dependent co-arising is empowering to social action, because there is not one single cause you have to seek out and attack — be it malarial mosquitoes or local interest rates. Everything is so interrelated that whatever you do, whether you decide to organize a pre-school, a community kitchen, or a craft cooperative, each is equally valid. Each endeavor toward human well-being pulls a prop out from under the house of suffering. I find that very applicable to social change here in North America. Whatever our contribution, it is of great value; we need not feel torn between responses to different aspects of the global crisis: “Oh, should I go out and try to protect the whales, or should I go march for disarmament at the U.N.?” If you simply stick with trying to stop the strip-mining, you’re helping to save the whales, because it is all interwoven.”