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Threatening to Devour

Greed is blamed for the malfunction of financial markets. But there is more to it than that, argue Amitava Krishna Dutt and Charles K. Wilber who see greed and dishonesty overlapping across the economic spectrum.

In the wake of the global financial crisis, President Obama declared that 'the days of reckless greed are over' adding, 'We will not go back to the days of unchecked excess [when] too many were motivated only by the appetite for quick kills and bloated bonuses.' In any discussion of the crisis, greed has figured as a major cause. But what do we mean by greed? A clear definition is hard to find. Taking as our framework the neoclassical concept of individuals in pursuit of maximum utility, greed may simply be the accumulation of goods and money in preference, say, to leisure time spent with others.

But greed is also used to describe behaviour that transgresses laws and regulations. This might include insider trading and falsifying accounts. The problem here is that it is not always clear when a law is broken. There are many grey areas that require interpretation. Another approach is to class as greedy behaviour that which offends what is normally regarded as permissible. Examples range from giving information known to be untrue to holding back knowledge to maximize reward without taking account of how this might affect others. There are certainly links here with the recent financial crisis. It was greed that led financiers to conceal what they knew in order to increase loans and sell assets. This in turn contributed to greater indebtedness and the instability of financial markets.

Greed also led to compensation systems—bonuses for short-term profits—which created incentives to engage in destabilizing behaviour, so that greed fed greed. Thirdly, greed led financial elites to pressure the government into relaxing and preventing financial regulations with the purpose of increasing their incomes, which made the financial system more vulnerable. Lastly, greed on the part of the rich had an important role in bringing about increases in overall income inequality in countries like the USA, prompting engagement in business practices that depressed wages and support of tax breaks for themselves. The result was stagnation of the real incomes of the majority which, combined with other factors, led to large increases in consumer debt. While this maintained consumption and aggregate demand in the short run, it proved to be unsustainable in the longer run as debt burdens grew and asset bubbles burst.

But doesn't greed always exist and, if so, can one argue that greed had a specific role in bringing about the crisis? Although there is no doubt that greed—in the sense of breaking social norms in the pursuit of personal aggrandizement—is present to some degree at all times and places, its role is likely to increase in some circumstances. Two major aspects of the current crisis are its financial source and its international scope. Changes in the structure of economies have increased the size of the financial sector compared to that of the non-financial or 'real' sectors in many countries, while enhanced communication technology and relaxed control have increased the importance of international financial transactions. As a result the financial sector is more fertile ground for the conduct of greedy behaviour. Because the financial sector deals in assets which are intangibles—rather than goods and services whose properties are more easily perceived by buyers and sellers—there is greater scope for obfuscation and prevarication.

Then again, that many market participants are working in isolation using computers instead of dealing face-to-face with people makes social restraints on greedy behaviour less effective. That financial actors often work in a closed environment makes it more likely that greedy behaviour will become infectious in organizational culture or in the culture of the financial community at large. Moreover, the fact that the amounts that are traded in a short time can be very large makes the effects of greedy behaviour more pernicious. Regarding international transactions, it is possible that interactions between people from different countries may mean that they are less constrained by the social norms that are shared within a country. All of these factors can explain why greedy behaviour increased during the run-up to the global crisis.

Along with factors which intensified greed, there were socioeconomic changes which altered social norms. In 1980 the elections of Ronald Reagan in the USA and Margaret Thatcher in the UK represented an alternative social consensus to the prevailing Keynesian welfare state—a return to less government and freer markets. The result has been the growth of ideology fixated on competition and success as the measure of a person's worth. Daily events are reminders of its sway, as reflected in the exaltation of sports and movie stars and Wall Street and corporate executives; the negative attitude of the business community toward welfare legislation; the downsizing of corporations in which the managers and stock holders get richer while the employees get fired; and the whole philosophy of success which measures the value of people by their income.

The promotion of financial success and self-interest was epitomized in the 1980s by the goal of newly minted Harvard MBAs to make US$1m. a year before their thirtieth birthday. By 2000 it was hedge fund managers and derivatives traders.

Businesses close industrial plants, create unemployment, devastate whole communities and call it an efficient reallocation of resources. They, who have prospered from free market policies, caution that nothing can be done because natural economic forces are dictated by globalization and competition. The poor, the unemployed and the underemployed are the ones who bear the burden of this free market ethic.

Government social programmes established during the previous 60 years are attacked because they supposedly reduce incentives and thus productivity. It was argued that lower taxes and fewer regulations on business result in higher profits, encouraging corporations and wealthy individuals to save and invest. Eventually the benefits trickle down so that even those on the bottom will be better off. However, this rarely happens.

If one believes that the natural order of society is one in which the strong win their way to power over the ruin of the weak, one will find nothing fundamentally wrong with this. It is then an easy step to understand, if not condone, the greed-driven behaviour within the financial sector that crossed the line to unethical insider trading, excessive risk-taking and neglect of obligations when handling other people's money. Since the movers and shakers of the financial world were seen as the Masters of the Universe, it is clear how government regulators were easy to convince that all was well. And given everyone's acceptance of the economics profession's teaching that markets know best, there was little reason to question what appeared to be unending success. Thus, a social consensus led to an atrophy of the normal legal, institutional and social mechanisms which, in earlier times, might have countered ethical lapses.

A central question we need to ask is whether the financial sector—especially as large as it has become—is good for society as a whole and whether such large profits for financial activities are justified? There is no question that the availability of finance can have positive consequences in terms of increasing production and income, utility and happiness. But this does not address the question as to whether the activity of financing justifies the rewards when the effort involved is simply making finance available.

Moreover, the idea that financial activity invariably has good consequences is questionable, especially when the financial sector becomes very large in relation to the rest of the economy. Market failures can lead to inefficiency by making the entire economy more crisis prone. When asset prices tumble and credit freezes the real sector is adversely affected as investment, output and employment drop, and unemployment rises. Also, large increases in income and asset inequality increases the power of financial interests to affect legislators and push for policy changes which are intended to bring about further increases in their income.

The neglect of these issues has led to an uncritical acceptance of the growing size of the financial sector. As a result, economists failed to recognize the crisis and even supported policies which made the crisis more likely.

The reluctance to examine the ethics of the financial sector is reflected in the use of terms like the efficient market hypothesis, capital market liberalization and financial liberalization, words which suggest hidden values in apparently value-free terms. The removal of regulation on banks and the decision to deregulate markets for new securities including derivatives can be traced to this problem.

The bias that economists and policymakers have shown toward efficiency and growth has supported neoliberal policies at the cost of other goals such as fairness, equality and the reduction of poverty and vulnerability. This neoliberal approach has justified weakening labour unions and reduced government support for the poor and the unemployed. It also means that policymakers are most concerned with the problems of government debt, thereby reducing their ability to pursue expansionary fiscal policies to reduce unemployment. All of this is not just the consequence of failing to take ethical issues seriously. It is also related to the nature of rewards in the economic profession, and also to the power and influence of those who believe that they benefit from such policies.

Extracted from Economics and Ethics: An Introduction by Amitava Krishna Dutt and Charles K. Wilber, both of the University of Notre Dame; published by Palgrave Macmillan.

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