Banking on Heaven: economics as confessional

Real-World Economics Review Blog

Banking on Heaven: economics as confessional

Jamie Morgan

‘I should like,’ said young Jolyon, ‘to lecture on it: “Properties and quality of a Forsyte. This little animal, disturbed by the ridicule of his own sort, is unaffected in his motions by the laughter of strange creatures (you or I). Hereditarily disposed to myopia, he recognises only the persons and habitats of his own species, amongst which he passes an existence of competitive tranquillity.”’ John Galsworthy, The Forsyte Saga.

The recent comment in the Sunday Times (8/11/09) by the Goldman Sachs CEO, Lloyd Blankfein, that banks serve a ‘social purpose’ and do ‘God’s work,’ was a controversial one. Reference to the Almighty in business and banking often leads to satirical exegesis. Many might respond that the liturgy of banks is public worship of quite another kind than might be ascribed to a divine being. Others might suggest that God’s work has been done if indeed we are approaching the end of times spoken of in Revelations. Perhaps the Four Horsemen of the Apocalypse are upon us. Perhaps for pestilence, war, famine and death one might substitute sub-prime, securities, shorting and bonuses. Yet if an end of times was upon us, some might consider bankers to be saints in the guise of sinners. Perhaps they have made the ultimate sacrifice by relinquishing their own place in any putative future paradise. If one takes the viewpoint that the banking system has impoverished us then they have nobly contributed to Mark 14:7. ‘The poor will always be with us.’ They have ensured that some will then be in a position to demonstrate their goodness on behalf of the poor at $10,000 a plate charity functions. Moreover, every time a banker accepts a bonus s/he makes the ultimate sacrifice in the name of Mathew 19:24. ‘It is easier for a rich man to go through the eye of a needle, than for a rich man to enter the kingdom of God.’ The eschatologically minded might ask you to think carefully about this next time you are struggling to pay your mortgage. Spare a thought for that holy banker who has selflessly taken the sin of your wealth upon themselves in order to guarantee you your place in heaven.

For the theologist these things are contradictions regarding free will and God’s will. Someone’s ‘evil’ actions seem necessary to creating the conditions of the ‘good’ for others. Here theology becomes theosophy: has doing ‘good’ prevented one from being good? This is a circle squared by Aristotelian thinkers like Aquinas in terms of the transformation of conditions. In De Malo Aquinas argues that malum culpae or ‘evil of fault’ is a condition created by the gap between what one is in terms of a distorted world and what one could be or should be. This may seem like a rather abstruse point to be exploring in an economics blog. But consider what Aquinas is hinting at: to resolve fundamental problems (systems, responsibility, ethical dilemmas, the real existence of adverse outcomes…) go back beyond taking the original conditions as given.

An absence of this kind of thinking is one of the fundamental failings of economics. In confessional vein I suppose I must call myself an economist. In so far as it might be relevant, I am also an atheist. Let’s call me an EA. Like anyone who has studied, taught, or written from the point of view of economics of the kind we call the mainstream I have experienced the seduction of its construction of puzzles. They are conducive to obsessive problem solving. They have enticing qualities. Like Euclid’s Elements they invite one to accept a number of propositions and then express them in ways that produce definitive answers. I say ‘express’ because the nature of the process is not really to explore: the curiosity and self-critique that one acquires as an economist exhibits severe topographical limits. I say ‘definitive answers’ not because economics rejects multiplicity. It does not, it allows for narrow multiplicity (the multiplicity of the mundane and often the inane). I say ‘definitive answers’ because the acceptable range of answers within problems posed are defining and thus excluding: they are part of boundary operations. Economics has boundaries and beyond them there is merely rumour, cartographic sigils, and perhaps a word of warning: the modern mainstream economics translation of Cave! Hic dragones is Beware! This is not tractable.

Euclid’s Elements, of course, has one great advantage over much of modern economics. You can actually construct a building using Euclidean principles and it would not fall down. If you built an economy that attempted to be genuinely faithful to mainstream economics it would fail. As recent experience shows, if one seeks even to legitimate and ‘liberate’ a market economy in ways faithful to mainstream economics one invites failure. A perfect circle may not exist outside of the imagination, some propositions, such as the parallel postulate, may be philosophically vexatious, but the relation between reality and rendition in Euclid is in the end rather different than that between a market economy and mainstream economics.

Let’s go back to my first paragraph. What would a mainstream EA make of it? The usual place to start would be with the problem of the agent. What is the banker’s dilemma? Mathew 19:24 would appear to bar the banker from paradise. A mainstream approach would be to fixate on Mathew 19:24 in a literalist fashion. Not a biblical literalism, an autistic economic literalism. Let’s call this approach an autochthonous singularity: a focus on a problem as self-seeding, in situ, or self-contained. This is an approach that functions as though the economist brings nothing but analytical clarity to the problem, an analytical clarity abetted (rather than compromised) by the rigour of tools that can express that clarity. The mainstream EA approach would then be to state that the problem is simply that needles are not big enough: we need needles fit for purpose! An EA might then argue that a parsimonious solution would be for the wealthy banker to assess his exogenous preference set and solve the problem in an optimal way by expressing a demand for larger needles. At the same time and in conformity with Say’s Law a vibrant market producing and retailing needles would arise.

A whole series of consequences would then follow in a mainstream EA world. Competition would be based on a monetarisation of divine incentive: the precise value that markets can place on needles of ever larger size would be a proxy for the value of a soul. Ultimate success would be the purchase and consumption of needles sufficiently large that even the most corpulent banker could step through without any need to risk sciatic trauma. Markets would equilibrate such that all those who could afford needles of various sizes and valued them in a corresponding way in terms of their given preference orderings could purchase them. This holy rolling market would foster new shifts in the allocation of resources calibrated through price signalling. The world’s resources would thus be ‘efficiently’ allocated rather than ‘wasted’. Pareto optimality would follow and human welfare concerns would thus be satisfied. The role of the economist would be to prove this. The role of the economist would be to ensure that policy was aware of the significance of these proofs. We, meanwhile, would live in a world of bigger and smaller needles that economists could also argue proved to us we also lived in the best of all possible worlds precisely because a model and a method told us that this was the case. Some of us, we would be told, would get into heaven because we were poor, the few, apparently, would get into heaven because they were rich. The system itself would distribute poverty and wealth based on how well we had pursued our ends (or chased our tails) when competitively driven to do so. This would be free choice exercised in the name of free markets and in which we all got what we deserved as our formal freedoms were practically pursued (but in which practical freedoms were never genuinely created). Each step in the process could be modelled and assigned definable outcomes – even the future.

Note this is an efficient and rational solution where the terms of the debate have been warped by the very concepts of numerical efficiency and rationality that constrain the process of thought. Taking a problem as an autochthonous singularity based on an economic literalism is a method so focused, so withdrawn to a single point, that it sheds no light on the original terms of the problem. No light can escape it because it is a singularity. It is a way of thinking about ends without asking about ends. It ignores ultimate concerns and fundamental critical analysis of that which gives sense to the original problems as posed by a subject matter.

Of course, anyone paying careful attention to the argument would note that I have posed this as how a mainstream EA might think. ‘A’ stands for atheist and one might counter that this status entails (forces) a rejection of the terms of debate because why pursue a rational strategy towards ends that in terms of one’s own beliefs are perverse? The simple answer here is that a mainstream EA would be one of the few to whom Pascal’s wager genuinely applied. Pascal’s wager is: if God exists then the failure to conform to what is necessary in order to appease God has consequences that God’s non-existence does not: ergo believe in God. The usual counter to this position is that one cannot rationally believe in God based on the risk that arises from the failure to do so: one is merely simulating belief through exterior actions (one cannot force oneself to believe). But the whole basis of mainstream economics is about how one calculates activity and outcomes and is thus always the simulation of belief in what one is doing. It lacks any genuine understanding or theorisation of a self with depth that is not a contradiction. It is individualism as exteriority. It creates a form of the behaviourist problem of validation and understanding of self through intermediation: you’re alright how am I? As such an EA proposing and indeed enthusiastically engaging in a needle market system would be a formal contradiction that was forever practically deferred by the shallowness of the concept of the human and the obsessive focus on the minutiae of problem solving. This is a problem solving whose inertia prevents one pushing out beyond cartographic limits into lands previously labelled Cave! Hic dragones. Mainstream economists are living contradictions and an EA in this context would simply be a particular form of that.

This brings me back to the significance of thinking about Aquinas. Mainstream economics is demoralising. It is demoralising in the usual way we interpret the word, since its very existence is a signal of the failure of better arguments to catch on (of thought to exceed knowledge in pursuit of new and better knowledge). But it is also specifically de-moralising: its method and meanings tells a story that simply marginalises morality as beyond its scope. Moral engagement, rather than moralising per se, or moral determinism that is not up for debate, should be a constitutive part of the process of critical construction of economic theories. Furthermore, we should always be prepared to go back beyond the original conditions as given.

Consider the following quote from Lloyd Blankfein on banker’s pay: ‘I don’t want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I’d like them to continue to do what they are doing. I don’t want to put a cap on their ambition. It’s hard for me to argue for a cap on their compensation.’

Now this is a perfectly consistent and in its’ own terms reasonable statement. It exists within a common contemporary logic that oxygenates financial system discourse. The logic is that incentive based pay, expressed in either partnership profit allocations or bonuses, motivate the individual agent to produce commensurately larger levels of returns for other ‘stakeholders’. For shareholders this is profits and thus dividends (and equity appreciation). For the population at large this is capital allocation for productive investment that motors the business cycle (creating jobs etc.) and capital allocation for financial investment that creates returns seen in pension funds etc and seen in financial innovations that expand credit creation and underpin the availability of mortgages etc. The logic follows from the work of Michael Jensen and others on the ‘agency problem’ in economics. For Jensen optimal growth is produced through ‘incentive realignment’. Put another way, pay key decision makers more and do so in accordance with scales, returns and profits and everyone gains.

There are many ways to critically approach this logic. A consequentialist might look at the terms of the justification and the actual outcomes and simply make the obvious substantive point that the alignment undermines itself since not only is it possible for the system to create gains to the key decision makers that are not reflected in overall gains to others, but the very mechanics of the focus of the system cause the interests of the two to periodically deviate. Here one might make the point that incentive realignment is about incremental gains and the push for incremental gains in a competitive system (competitive between decision makers and between the organizations in which they operate) incrementally destabilises the system. Incrementalism is actually an incentive to pervert incentives and to subvert brakes on the perversion of incentives: the system has an accelerator but no effective breaking mechanisms because financial innovation is regulatory subversion and expanding returns means confounding control.

Approaching the problem in this way invites one to think about how one can introduce effective breaks and what it would mean to genuinely align interests. For example, one might think about changing the nature of time horizons from the short to the long through restructuring pay incentives. This is one of the major ways reform is currently being thought about in the banking system.

One might, however, want to take the next step back and ask what are we interested in incentives for? We are interested in incentives to produce a virtuous circle of growth that feeds across all areas of the economy. This is the context of justification for pay inequality and the huge income disparities created by providing bankers, traders etc. with contracts that allow them as individuals to receive significant proportions of collective wealth. The idea is that they are pivotal in creating it.

Let’s assume for the moment that they are potentially pivotal in creating it. The lever of the argument still remains ‘incentive’. Aligning incentives can be looked at in many different ways. For the majority, the flexibilities of modern labour markets expressed in mainstream economics have been founded on job insecurity. They have been founded more on stick than carrot. One might make the argument that what bankers, asset traders etc. lack is genuine job insecurity. By this I don’t simply mean that they cannot be fired. I mean that once they are in the league that earns US$1m bonuses they need not genuinely fear being fired. For the majority work is about livelihood, but for these financial workers it is about ego, status, and ordinal rank amongst a wealthy coterie (one might say they are ordained when inducted into the top flight of finance). If one goes back beyond the original conditions as given to reconsider the problem one might make a case for creating genuine job insecurity for the upper echelons of the financial system.

Genuine job insecurity would create a quite different approach in considering Lloyd Blankfein’s statement that ‘It’s hard for me to argue for a cap on their compensation.’ ‘Compensation’ is a curious term. It creates connotations of what has been foregone during the arduous and supposedly less preferable period of work. Yet since 5 years in the top echelons of finance will earn a person of ordinary consumption ambition more than they could reasonably spend it would follow from the connotations of compensation that a banker should retire quickly. That s/he does not is a signal that the work is not about ordinary consumption ambition and that the work is actually preferable to alternatives, in which case, according to the logic of compensation, perhaps these financial workers should be paying us for the privilege of managing our money? This seems absurd and perhaps trivial but it is a serious point: the terms of the debate need to be questioned. Financial workers lack job insecurity and they value their work as more than pay, but obviously and paradoxically that is because of what the pay signals to others. The pay is not compensation per se it is symbolisation. Blankfein’s statement would, however, be quite a different one if he tried to defend multi-million dollar remuneration with the statement: It’s hard for me to argue for a cap on their symbolisation. The absurdity would then be reversed and attributed to the financial system not to the critic.

Consider also that the notion of incentive realignment can be viewed as not one of scale but rather of ratios. A financial worker who received a bonus that was some miniscule fraction of trading volumes, revenues, returns or some other indicator is still one that is incentivised. A financial worker might consider the sums derisory. But that is because of their expectations of wealth and the relative returns to others in the financial world. Outside the financial world, economics argues for the management of expectations to create stability: monetarists opted for crushing hikes in interest rates in the early 1980s in order to ‘squeeze inflationary expectations’ out of the system. It is curious that this logic does not apply to the financial world. One could argue for squeezing unreasonable expectations of large remuneration levels out of the finance system. This would actually also address the second issue of ‘relative returns’ since the change would need to be systemic. The real arguments for maintaining pay levels are simple inertia and the counter that if we paid less key workers would go elsewhere where pay is more. Note that neither of the most powerful arguments for financial worker pay are about incentive at all, they are about failing to fundamentally confront systemic circumstances at the level of the system. As such, they are in the language of mainstream economics, about failures to confront the frictions in a given labour market. It is a curious tension that financial labour markets are part of a finance system that has been justified by mainstream tenets at the same time as being a prime example of, in terms of the language of this way of theorising, a ‘distorted’ labour market.

If you are feeling that the points above seem somehow to be missing the point because the real world is a place of difference, compromise and pragmatism, a place where any policy intervention must confront power, then I offer you two final considerations. One of the things that needs to be done is to show precisely the absurdities of theory, such as economics, in its relation to reality. Moreover, we need to think more about the historical mutability of reality: this is also a forward looking imaginary process. A situation where the upper echelons of the financial system earned basic pay of US$100,000 per year and bonuses based on much smaller ratios than is currently the case is not inconceivable. Prior to the transformations of the 1980s the remuneration differentials in most economies were far smaller than they are now. The new situation came from somewhere and can thus be removed because it is contingent rather than necessary. One needs to ask the fundamental questions: is the differential (and scale) good and is the differential (and scale) desirable? I leave these questions with you. What I would say is that the upper echelons of financial work can be well paid and reasonably incentivised rather than astronomically paid and incentivised in an incendiary way. Financial workers would then have to think about how to work a full and long life in the same way as the majority. They might then have genuine job insecurity. Their relation between livelihood and symbolisation would have more in common with the rest of us. This would be social incentive realignment: a move towards conformity in community. It would contribute to a system without levels of income differential that were both economically and socially destabilising (one of the main causes of the financial crisis through the seduction of debt creation). I’m not suggesting that job insecurity or simple incentive ratios are necessary or sufficient. To a degree they are small within system solutions that begin the process of transforming aspects of it. One might want to think on a grander scale. Job insecurity and smaller incentive ratios are simply proposals that illustrate the importance of thinking differently. As I’ve tried to say in a rather roundabout way this is something economists in particular don’t do enough of. An EA, rather like a member of AA, needs a place to begin, a process of (12) steps to set off in a new direction. Post-Autistic/Real World Economics, of course, has been a prime site for the beginning of such a journey.