A few years ago Francis Fukuyama wrote Trust: The Social Virtues and The Creation of Prosperity. The short of it is that modern economies tend to be “high trust,” you can rely on more than simply your family to get by in life because institutions are transparent and laws are honored more than breached. The System works, it is not something that exists to be worked. Americans have their own spin on the System, exemplified by the Horatio Alger stories. With hard work, perseverance and a little luck anyone could make it big. In contrast in non-modern economies it is more a matter of to whom you are born and who you know. Success is the outcome not of non-zero sum wealth creation through frugality, thrift and productivity, but taking the largest slice of the zero sum pie possible through connections.
You have probably read Simon Johnson’s The Quiet Coup, where he argues that governmental institutions have now been captured by private actors in the developed world, just as they have long been in the developing world. For me the turning point in the drift toward paranoia was this summer when I listened to an interview with Charles Ellis, author of The Partnership: The Making of Goldman Sachs. What disturbed and alarmed me was Ellis’ undisguised contempt for the radio host and the callers. Granted, it is generally frustrating for intelligent people to come on these shows where they are asked to hold forth for 30 minutes and engage with dull interlocutors. But Ellis’ own attitude to the whole affair suggested an angel come down from on high, he made no effort at all, and refused to hide his lack of effort. What he thought of everyone else was clear, mortals were beneath his consideration. When he did deign to speak Ellis calmly would assert that Goldman Sachs was insured and protected no matter what happened to the economy, specifically, even if AIG collapsed. Now, to some extent public relations people will say the same thing, but there’s a particular false tone these types exhibit which gives you a clear indication that they’re being paid to say what they’re saying. Charles Ellis did not have the tone, he stated it in a calm and matter of fact manner. He contended that the banks were saving Main Street, which was the root of the problem, and that Goldman in particular was an organization of such competence and efficiency that it could weather any storm.
To some extent this is a confidence game. The financial sector deals in trust. But Ellis unnerved me with his calm, assured and superior attitude. Today we are hearing that the Treasury Secretary, Goldman alum Hank Paulson, gave his old firm a heads up on government policy. A part of me wondered listening to Ellis if he knew much more than he could say. One year ago I would not have entertained the possibility of secret cabals and conspiracies at the highest levels of government. Now I’m not as confident.
I began thinking of this as I read this post over at Marginal Revolution where Alex Tabarrok bemoans the counter-productive effect of pay caps on large corporations. What is striking is the vociferous tone of the comments which Alex has been receiving: if the readers of MR react this way it makes me highly skeptical that the public has any trust in the system at all.
A lot of the business execs who share a lot of the blame for the current financial crisis have paid very little cost for their actions. These guys are politically connected, and got the government to bail them out. I lost a fair amount of money selling a house a few years ago, and I didn’t receive a dime from the government. Of course, I didn’t deserve a dime, but neither do the people who did get money.
I was against the bailouts from the very beginning. If the government hadn’t bailed anyone out, the short term costs would have been greater, but the long term benefit would have outweighed it. It would have been a terrible two years, but it would no longer be “business as usual” at the banks, execs would have been more careful about risk since they would know that there is no safety net, and the debt would be $1.5 trillion less than it is now.
Just talking to people, I have noticed a populist backlash against the bailouts as ordinary people see the elites taking care of their own. Whether this will help the Dems or the GOP has yet to be seen. I do think this whole episode has reduced trust in the government. I want people to trust their neighbors, but I welcome a healthy mistrust of government.
He bemoans the theoretical effect of pay caps. One need only look at Canada’s much stronger, more-regulated banks to wonder if the effect is such a bad thing.
The government is a major shareholder and thus has a say in this kind of thing. The same is true in my small private company. We capped our pay at the request of our biggest shareholder (who does not own anything close to an outright majority – the three operating partners together could easily outvote him).
I do think this whole episode has reduced trust in the government.
i think it has reduced trust in non-local institutions. i.e., anything outside family & friends. if you live in a small town perhaps mom & pops are included. i don’t think that’s a good thing, the modern economy needs economies of scale in trust.
one fundamental problem with the ad hoc bailouts is that they’re all case-by-case and it’s really hard to talk about them in any normative framework. in other words, we’re not working in a system of laws, we’re talking rule by big men. this is really evident when center-right public intellectuals start repeating talking points about non-interference in the market and allowing it work its magic. talk show hosts and antagonists automatically jump on them, but they don’t have any handy response in their script. what are they going to say? similarly, the anti-capitalist reflex has an antimonian and almost self-destructive aspect to it. this sort of populism has roots i think in evolutionary psychology; we punish those who we believe commit wrong even at a cost to ourselves.
i think the biggest thing that defenders of the free market, which obviously is the best way to produce growth and spread wealth across society (as an empirical matter), is to come to terms with the obvious market failure which occurred. take some responsibility, admit that we’re trying to muddle ahead.
@John, I’m sympathetic to your POV, but this sentence leaped out at me:
It would have been a terrible two years
This strikes me as the kind of thing that would’ve casually been said by Charles Ellis. The Great Depression, and indeed previous panics and depressions, strongly suggest that illiquidity at these levels can level an economy for a decade or more.
Bernanke’s massive intervention is the Powell Doctrine of economics.
The bezzle of embezzlement
Extracts from “The Great Crash: 1929”, John Kenneth Galbraith, First Published 1955, Page 152 to 153.
“In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should be called the bezzle. It also varies in size with the business cycle.”
Poorly developed self preservations skills
Extracts from “The Great Crash: 1929”, John Kenneth Galbraith, First Published 1955, Page 210.
“As noted, all this might logically be expected. It may not come to pass. This is not because the instinct for self-preservation in Wall Street is poorly developed. On the contrary, it is probably normally and may be above. But now, as throughout history, financial capacity and political perspicacity are inversely correlated. Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present. So inaction will be advocated in the present even though it means deep trouble in the future. Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.”
How a revolution erupts from a commonplace event–tidal wave from a ripple–is cause for endless astonishment…
First a piece of news about something said or done travels quickly, more so than usual, because it is uniquely apt; it fits a half-conscious mood or caps a situation… The fact and the challenger’s name generate rumor, exaggeration, misunderstanding, falsehood. People ask each other what is true and what it means. The atmosphere becomes electric, the sense of time changes, grows rapid, a vague future seems nearer…
As further news spreads, various types of people become aroused for or against the thing now upsetting everybody’s daily life. But what is that thing? Concretely: ardent youths full of hope as they catch the drift of the idea, rowdies looking for fun, and characters with a grudge. Cranks and tolerated lunatics come out of houses, criminals out of hideouts, and all assert themselves…
Such is, roughly, how revolutions “feel.” The gains and the deeds of blood vary in detail from one time to the next, but the motives are the usual mix: hope, ambition, greed, fear, lust, envy, hatred of order and of art, fanatic fervor, heroic devotion, and love of destruction.
–Jacques Barzun, From Dawn to Decadence: 500 Years of Western Cultural Life 1500 to the Present
“E pluribus unum” — out of many, one — was the national motto the men of ’76 settled upon. One sees the pluribus. But where is the unum? One sees the diversity. But where is the unity? Is America, too, breaking up?
Is American falling apart?/Pat Buchanan
~~~~~~~~~~~~~~~~~~~~~~~~~
Heaven help us, Ingot We Trust.
Let’s see, embezzlements and swindlings from the fishing villages in the icy fjords of Norway to dusty crossroads in the Australian Outback to school districts in Florida to counties in Montana to retirees in Hong Kong to municipal sewer systems in Alabama and all points in between…public, private adn individual.
A giant Headless SuperDuper Colluder comprised of ratings agencies and congressmen and investment banks and administrations and regulatory agencies and ad infinitum.
The man in the street, not understanding any of it in its infinite complexities,
has a popular populist gut sense of having been royally screwed, a sense which is not misplaced whereas any trust would be.
Papering it over to buy time with nuclear fueled debt printing presses, creating debt to get of it, is a tsnunami wave of liquidity sans a particle of photon duality. Use the farce, Fluke. To grasp astronomical trillions one may’s well attempt light years, kiloparsecs or the reality of the face of sun, it is realms of absurdity. Ms. Tomlin, paraphrased: No matter how big number innumerate you get, it’s impossible to keep up. At this point, trust every man for himself.
The blind poetess of justice says anger denial bargaining depression acceptance, should it save any time, is an arrival at destination before a mirror, eta unknown.
Then the finger pointing can begin with any accuracy.
Her sister, the double blind poetess of justice says those who endeavoured to enable ever greater state say-so over the individual and his/her choices in order to save the world and make it a better place will be receiving everything they hoped and prayed for, good and hard, for not them but their worst fears in charge.
“if the readers of MR react this way it makes me highly skeptical that the public has any trust in the system at all.”
You are realizing this NOW? The outrage over Wall Street is wide and deep, sir. Also, anyone who thinks that executive compensation in general and Wall Street compensation in particular has any connection to merit or the market hasn’t read the objective literature on these matters at all.
He bemoans the theoretical effect of pay caps … The government is a major shareholder and thus has a say in this kind of thing.
Interestingly the government makes absolutely no demands of the unions or their management. The UAW received tens of billions of dollars in direct government subsidies and ownership at the expense of senior creditors, whose legal claims were trampled by the Obama administration. Talk about larceny. Where are the pay caps for union officials? Why is it legal for the UAW, now the majority owner of both GM and Chrysler, to negotiate contracts with Ford Motor, their competitor?
Call me a simpleton, but if these executives aren’t paid as much as they want, and I guess seek employment elsewhere, will they get more $ elsewhere? It seems people are comfortable when people make a lot when then run successful companies because that benefits everyone. However, getting paid a ton for rigging the system or ruining a company doesn’t make sense.
One need only look at Canada’s much stronger, more-regulated banks …
More regulation would not have prevented this crisis. Putting aside the fallacy that more regulation equals good regulation, it was government envolvement that laid the foundations for the crisis to begin with, as Peter Wallison explains:
When the crisis first arose, the left’s explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of “predatory” lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages. This idea underlies the Obama administration’s proposal for a Consumer Financial Protection Agency. The link to the financial crisis—recently emphasized by President Obama—is that these mortgages would not have been made if regulators had been watching those fly-by-night mortgage brokers.
There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending.
WSJ
As the FHA begins it’s meltdown, the Democrats are currently in the process of expanding the very programs that nearly brought down the entire financial system. Hope and cahnge.
The System works, it is not something that exists to be worked.
Why not? If this short life is all the time that I have and there is absolutely no authority, outside the government, to whom I must answer, it becomes a question of odds, not of morality – whatever that is in a secular world. The odds against getting caught are certainly better than the lottery, and in the event that I am caught the chances of a relatively light sentence, parole and even “redemption” ala Michael Milken are good. After a life of opulence, Bernie Madoff will spend a few short years in prison before succumbing to his illness and slipping into the void, with a little better planning I may be able to avoid prison entirely. Welcome to the secular world.
Welcome to the secular world.
right, in a world where 90% of people believe in god 🙂 anyway, your comment is the typical moronic conflation of morality with religion. start with stupid assumptions, and get to stupid conclusions. a genius you are in moron’s bizarro world! i commend you sir.
You’re right.
We don’t trust the system, at all.
@David Hume
Leaving aside whether there’s scientific evidence for innate moral motivations that precede any moral theory the individual uses to explain them (that’s a hint, Art), a significant check on wide-spread Madoffism is the present cost to his reputation and the present and future costs to his children and adherents in the form of material loss and social ostracism. If the response from the rest of the individuals making up society on discovery of a Madoff is to be angry that he benefited a group they didn’t belong to at a cost to them, but not to object to the principle that defrauding others for the betterment of the family or clan is an expected goal for the powerful in financial or government institutions, then our modern economy is living off its institutional capital.
Razib, do you have any data showing how public attitudes towards clan-benefiting peculation vary between oligarchic Russia, African kleptocracies, and the U.S.? What would reassure me a great deal would be to find out that the U.S. has far lower positive answer rates to questions like “It is acceptable for a businessman or politician to take money from other parts of society by any means in order to benefit his community?” Well, that’s a terribly constructed survey question but I hope it’s clear what I mean. Given how many frustrating discussions I’ve had with people who approve of their local politicians bringing home pork while simultaneously condemning the same behavior in other jurisdictions, I’m not very confident the data will be reassuring.
your comment is the typical moronic conflation of morality with religion
Religion is the foundation of morality. It reveals a constant code of virtuous conduct predicated on God’s natural law. These laws are self-enforcing since the violation of them results in predictable negative consequences. Religion places an individuals rights and responsibilities beyond the ever changing fashions of society and endows them with force and permanence. In a world without God morality is little more than an opinion poll, anything that society, or it’s elites, determines to be moral is moral and individual rights are little more than gifts from the state. Such a world exists to be worked.
Religion is the foundation of morality
no.
Such a world exists to be worked.
it is the only world we have, the only world we have ever had.
Religion is the foundation of morality
no.
Strong argument. You’ve convinced me.
Strong argument. You’ve convinced me.
since you’re stupid, that does nothing for me 🙂
I’m a disbeliever in pretty much every conspiracy. Heck, I even believe Oswald acted alone. But conspiracy or not, the revolving door between Goldman and the Fed is creepy, and profoundly undemocratic.
But conspiracy or not, the revolving door between Goldman and the Fed is creepy, and profoundly undemocratic.
your unease is fucking irrelevant. all of our unease us irrelevant. not only is it probably irrelevant, but it is nakedly and open irrelevant. of course, who knows what the future holds, things could change. but the fact is that our complaints and worries don’t matter, the men of gold will always take care of their own.
@Ethan Not Razib, but Culture Matters by Sam Huntington and Lawrence Harrison covered the subject in a fairly easy yet still scholarly manner. While some contributors engage in hand-waving, most of it is fairly well argued.
I disagree that Art is stupid; I believe he would need to increase his intelligence an order of magnitude to reach stupid. Religion is the foundation of morality. Which one? The Aztec religious ceremonies called for human sacrifice. Most “mainstream” religions accommodated slavery and institutionalized misogyny. Morality has always been relative to the contemporary milieu. Religion has mostly been about the establishment, acquisition, and maintenance of social power; morality had little to do with it.
Razib, I think the question of morality is an interesting one. I tend to think that the basis for human morality (rather than Ethics which is philosophy and perhaps unanswerable) is found in our evolution and genes. Given that I’d note that questions of morality are very much caught up in the evolution of social groups. It seems the one thing civilization has done is allowed us to expand that instinctual sense of family or tribe quite broadly. When you consider how many, for instance, feel kin to other Americans and give a certain ground level of trust that in other culutres might extend to at most several dozen individuals, that is quite amazing. Yet when the structures, especially abstractions we hold, start to break down we ought expect a move towards more tribalism. This will be a matter of degree of course. I don’t expect to ever see a return to even Feudalism let alone something worse. But we ought expect a lack of trust to exasperate identity politics and the divide between groups. While admittedly that was going on under the Bush administration (for a different set of reasons) it seems clear that identity politics really is becoming more prominent.
One can but hope that, however unfair, the press’ desire for a successful Obama administration makes them hype to end of the recession and get public sentiment back on track. I say that not because I think it right or fair, but simply because it’s probably the best bet we have to cut off this social breakdown we’re seeing.
Whoops: “…makes them hype the end of the recession…” Sorry for the typo.
I should add that I could see if going either way. In a certain way Obama is well past his honeymoon with the press. And sadly turmoil and sensation sells much better than peace and harmony. Whether when the expected reports of the end of the recession for the fall emerge the press hypes it or focuses in on the unemployment, a lagging indicator, will be interesting to see.
clark, i tend to agree with your line of thinking. in any case my lack of patience with art’s stupid line of argument is that it is moronic to enter into a presuppositionalist line of reasoning when the rational expectation is that those in the forum that you are participating in do not accept your presuppositions. as an inversion, it would be if i walked into a christian forum, and explained that morality necessarily has nothing to do with god, as humans tend to be moral, and, god does not exist. i’d be a fool lacking in humility to engage in such boorish behavior.
[the blogs you note as being down are not down for me, must be a problem between your location and the servers those blogs are hosted on – DH]
Yes and this is somewhat a “good thing” since we know that most of civilization benefits depend on some critical mass of human ressources but OTOH leftism is this very same tendency gone to the extreme (egalitarianism).
I am afraid there is no possible stable consensus about what a “middle point” could be.
What disturbed and alarmed me was Ellis’ undisguised contempt for the radio host and the callers…Ellis’ own attitude to the whole affair suggested an angel come down from on high, he made no effort at all, and refused to hide his lack of effort. What he thought of everyone else was clear, mortals were beneath his consideration.
since you’re stupid, that does nothing for me
They say imitation is the sincerest form of flattery. I’m certain, that since Ellis is actually intelligent, it works better for him.
Yeah, yeah, yeah. I know, I’m stupid.
Save your breath, you’ll need it to blow up your girlfriend.
Obviously this isn’t a sincere belief.
Arent’t you ashamed of such a blatant lie?
(I mean about your knowledge of the fact…)
How does this square with God given morality?
i think it has reduced trust in non-local institutions. i.e., anything outside family & friends. if you live in a small town perhaps mom & pops are included. i don’t think that’s a good thing, the modern economy needs economies of scale in trust.
But surely, if the current crisis proves anything at all, it is that this trust was misplaced? Neither corporations, nor governments, nor the mass media have proved worthy of the trust formerly reposed in them. The former would sell their grandmother for five bucks (and don’t even really serve their own shareholders – there are executive breaches of fiduciary duty all over the current crisis) and the latter two are on the take from the former (including one TV channel that has become an outright propaganda organ).
That’s precisely what makes trust in institutions so difficult to rebuild — but doesn’t it also argue that perhaps it *shouldn’t* be rebuilt? That we should reshape the economy not on trust, but on verifiability?
That said, I probably still won’t think twice about drinking my municipal water or cooking up some FDA-inspected beef (unless some independent investigator finds a problem the government missed or covered up). But there are some people who actually believe that the medical profession is selling them poison disguised as a disease-prevention measure. It’s hard to top that for mistrust of institutions.
…(including one TV channel that has become an outright propaganda organ).
That’s alright, no watches MSNBC anyhow.
But there are some people who actually believe that the medical profession is selling them poison disguised as a disease-prevention measure. It’s hard to top that for mistrust of institutions.
Well, why not? We have a president who apparently believes doctors want to rip out kids’ tonsils and cut off people’s legs for a few extra bucks.
Still, I agree with your larger point. We need more transparency when public money is on the line.
It’s good that people are mistrusting medical institutions. It’s bad that people are doing so stupidly, instead of replacing blind faith in doctors with reasoned skepticism.
The basic problem seems to occur with financial institutions as well – instead of reasonable responses to the gross misbehavior of various groups, we’re getting nothing but calls for more powerful government and increased regulation.
@
Caledonian
One of the benefits of widespread trust in institutions is that the general public will always mistrust stupidly, rather than with reasoned skepticism. Even when there is good reason for the mistrust.