The Global Financial Crisis: Greed Ain’t so Good?

Economic Rationalism, Capitalism, Neo liberalism or whatever you want to call it, has had two solid decades of widespread acceptance.

When business is good and unemployment low, we put up with big executive bonuses and stand aside as the economic way of thinking is driven into every aspect of life. Though we might feel squeamish at Oliver Stone’s Wall Street Villain, we are loath to withdraw our tacit support for the economic status quo, especially at the polling booths.

How times can change …

Pick up a newspaper now, and critics leap from every page. Australian Prime Minister Kevin Rudd, in a speech in St Paul’s Cathedral in London recently described unfettered free markets as having become ‘worshipped as a god.’ ‘We know now that god was false,’ he declared.1  The Global Financial Crisis has created a need for a major re-think about the market and how it is to be regulated.

The recipe for the crisis is now well known. Take a series of low quality (sub-prime) mortgages, slice and dice them into complex financial claims (derivatives). Mix through the global banking system until neither the derivatives nor the risks to the system can be valued, and serve up. The effects of global indigestion are still being felt, and an after dinner tiff about our economic system has erupted.

Some defend our system, even in the teeth of a recession whose effects are shared very unequally. They interpret the crisis as unavoidable bad luck. Every economic system has its sour moments, so the argument goes, but our system delivers better outcomes than the centrally planned monstrosities of the Soviet era.

But government debt is rising at its fastest rate since the Second World War while governments bail out their financial sectors and fill in a gap of private spending

They point out, correctly, that markets can guide the uncoordinated actions of self interested individuals towards good social outcomes—Adam Smith’s ‘invisible hand’. For example, a failed banana crop requires that bananas be rationed to consumers, and that producers be encouraged to plant more. An increase in the market price of bananas motivates self-interested consumers and producers to that end, without any need for coordination or altruism.2 The supporters of the market system also caution against government intervention. As Ronald Regan famously put it “The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help’”. 

But government debt is rising at its fastest rate since the Second World War while governments bail out their financial sectors and fill in a gap of private spending. Regan’s words—amusing as they are—strike a discordant note.

Another defense of the status quo is a moral one. The so called capitalist bargain justifies inequality, because risk taking and entrepreneurship is a dangerous pastime. Just as no reasonable person would object to a worker in an unstable mine receiving ‘danger money,’ we shouldn’t begrudge a wealth premium to our innovators.

But rising unemployment reminds us that there are many people who have ‘high risk, low return’ work. Are they compensated enough for uncertain employment, and other risks?3   And, governments have blunted the downside risk for those already receiving staggering amounts of danger money.4   Even the pro-business Economist is uneasy:

The debate about how to alter the economic system will doubtless continue, but it will do so along two very different lines. One debate will be about putting in place the best rules for the system. This is the legitimate responsibility of governments which will doubtless be exercised in consultation with business leaders, professional academics and the general public.

In Christian thought, humans inevitably worship—that is, they ascribe supreme value to something or someone

But another debate will be about the extent to which people will stop worshipping what the prime minister called the ‘false god’ of ‘unfettered free markets’.  As society moves into a debate with religious overtones, it might be helpful to briefly lay out a religious perspective, which will at the very least have the benefit of making sense of terms such as ‘worship’, and ‘false god’.

In Christian thought, humans inevitably worship—that is, they ascribe supreme value to something or someone. The proper target of worship, according to this thinking, is God; all other targets are called ‘false gods’ even if they have intrinsically good features. This includes the worship of self, sex, beauty, knowledge, one’s nation or even humanitarian causes. So what does it mean to say unfettered free markets have become ‘false gods’?

Let me begin with a comment from a student in my International Economics class, whom I have no reason to think is religious. When asked to nominate the key values of Western Society, two were offered:

I take this student to be saying that ‘the unfettered free market’ is not, in itself, the ‘false god’ that is worshipped. Rather freedom—to make choices and to pursue ‘bought experiences’—is the culprit.  The prime minister implied a similar thing about the freedom in his speech when he sought to balance his comments about markets by acknowledging their ability to promote ‘empowerment’. 

It is important to note again that ‘false gods’ in Christian thought do not have to be intrinsically bad. Freedom is undoubtedly a great gift of God that we rightly value highly. But it is easily misused—turned away from a focus on God and others, worshipped in its own right, it gravitates inexorably toward the self. The ‘freedom’ of one person can trample another’s hopes of security, safety and well-being.

Perhaps the most damning thing that could be said about our economic system is that it can encourage this gravitation-towards-self process.

Adam Smith’s invisible hand is, I believe, a helpful way of limiting unnecessary and unhelpful government regulation—we don’t really need a Dept. of Bananas.  But it doesn’t take too much thought to realize that the invisible hand also provides a rationalization for the unrestrained pursuit of self-interest, for greed, and for self-worship. As the despair deepens, we are all beginning to recognize the consequences of that.

Dr Gordon Menzies is a Senior Lecturer in Economics and the Deputy Director of the Paul Woolley Centre for Capital Market Dysfunctionality at UTS. He worked at the Reserve Bank 1986 to 2002 inclusive, and his doctoral work in Oxford was on the Asian Financial Crisis.

1. ‘Free markets a false god, says Kevin Rudd’ The Australian, 1st April, 2009.
2. While giving markets their due, it is important to remember that markets don’t always work like this. Two very important problems are information asymmetry (where one party to an exchange knows more than another) and externalities (where the weighing of costs and benefits by decision makers ignore certain side effects, such as greenhouse gas emissions).
3. A low paid US worker who cannot afford health insurance does not receive any danger money.  
4. Between 1947 and 1979 the top 0.1% of American earners were, on average, paid 20 times as much as the bottom 90%, according to the Economic Policy Institute, a think-tank in Washington, DC; by 2006 the ratio had grown to 77 (The Economist More or Less Equal, April 2 2009).