[iDC] The ethical economy and the current financial meltdown

Sun Nov 2 15:57:37 UTC 2008

Thanks for that excerpt, Michael.  I have some constructive comments
regarding these ideas and some critical views.  Parenthesized numbers refer
to footnotes (which are usually points I've elaborated on my blog).

A) Building reputation systems for financial securities is a good idea, but
will run into some legal barriers--at least in the US, the system I am most
familiar with.  The extant credit rating system for securities failed
because it was totally nonaccountable and was paid for by the entities
seeking ratings.  They could shop around for the easiest grader.  Many
scholars are working on this problem.(1)  But they will face raters who will
say their "free speech" rights give them a constitutional right to be free
of substantive regulation or liability for bad or manipulated ratings.(2)

In the US, the lawyer rating site Avvo (which set itself up to evaluate the
life-conduct of lawyers) has successfully used the First Amendment to fend
off all legal efforts to make it more accountable.(3)  Doctors have
pressured insurer-backed doctor-rating sites to be more transparent, but may
not be able to get real regulation of them from government.

B) Nevertheless, some scholars have proposed a "Financial Products Safety
Commission" to evaluate the value and safety of proposed financial
arrangements, and that may be a good base for your proposal.(4)  But you
will also find resistance in the finance community to transparency in the
terms of the "products" they offer.  They consider trade secrecy here to be
a big part of the "value" they create.(5)  I find it hard to believe that
this is a real business model, but perhaps secrecy contributed to the
finance sector's ability to grab about 35% of corporate profits in the US
and UK as of 2005.  I also worry about "distributed contributions"
here--aren't crowds subject to just the kind of irrational exuberance that
led to the current crisis?

C) That's one reason why I favor a far more dirigiste approach to the
current crisis.  As someone who works on health law, I find the model of
government funding and influence there a model.  US governmental funds
account for between 43 and 60% of health spending in the US (depending on
the accounting).  That federal contribution is used as leverage to assure
several progressive characteristics of an admittedly bad system.  For
example, federal funding to many hospitals is conditioned on their having
emergency rooms, taking some Medicaid patients, etc.  I am presently
proposing a plan to condition federal subsidies in medical education (which
are between $500,000 to $1,000,000 per medical student) on students' binding
commitment to take a certain percentage of their patient load as Medicare
and Medicaid (i.e., public program) patients.  This is essential in our
mixed public/private system because many specialists now can get all the
money they want from privately insured patients, and simply refuse to see
those in public programs.

What does this have to do with the bailout?  To me, we have to tell the
banks that they only get bailout money if at least half the money goes to
broadly defined social purposes--say, 25% to green energy investment, 20% to
infrastructure (our roads and bridges are a mess), etc.  If the finance
sector gets as much public support as the health care sector, it ought to be
as universalistic and moral in its aims.

Consider the alternative.  As financier-turned-academic Paul Woolley has
observed, "There is no economic merit in a sector that makes exceptional
profits and devours capital and labour, and then justifies it on the grounds
that you can get some 'cash back.'"(6) There is a cozy revolving door
relationship between academics, regulators, and tycoons in high finance. All
were complicit in a parasitic reallocation of money from the real economy to
speculative games designed to enhance cream-skimming at the top.  I see no
reason why a distributed assessment of the value of the various schemes
these people cook up won't be dominated by the same self-serving
get-rich-quick ethos that has poisoned the global economy.(6.5)  As G.A.
Cohen has written (in a critique of Rawls entitled "Where the Action Is"),
attitudes and ethics matter just as much as institutional structures.

We also need to look critically at where the funds for investing are coming
from.  As James Fallows has reported, "China's government imposes an
unbelievably high savings rate on its people."(7)  I fear that the more
deeply one contemplates these flows of money, the more worried one has to be
about a) their stability, b) their unfairness, and c) the authoritarian
foundations (in China) of a go-go, free market economy in the developed
world.(7.5)

Real wages in the US have declined over the past 7 years (even as
productivity has gone up), and that gap has largely been "made up for" in
borrowing. That borrowing is in turn largely predicated on the forced
savings of tens of millions of Chinese.  A mania for massive,
fuel-inefficient SUVs in the US is financed by a country where, "on winter
nights, thousands of people mass along the curbsides of major thoroughfares,
enduring long waits and fighting their way onto hopelessly overcrowded
public buses that then spend hours stuck on jammed roads."

In conclusion, I am deeply skeptical of the finance sector and the types of
flows of resources it enables.  In the end, a stock price is only a
prediction of future income--and who knows how much of the "value" of a
given nation's stock prices is simply an estimate of how much that nation's
corporations will be able to get its government to impose their will by
force on other nations.(8)

But I also realize that the finance sector's domination of political
discourse here will probably prevent any truly fundamental reform of it.(9)
So I welcome your proposal as a way of bringing some accountability to it.

-Frank

Frank Pasquale
Visiting Professor of Law (Spring 2009)
Yale Law School
127 Wall St.
New Haven, CT 06511

NOTES

(1) see
http://www.concurringopinions.com/archives/2008/10/rating_agencies.html, and
my comment on it

(2) see
http://www.concurringopinions.com/archives/2007/08/from_first_amen.html

(3) see http://blog.ericgoldman.org/archives/2007/06/lawyer_ranking.htm

(4) see
http://www.concurringopinions.com/archives/2008/04/financial_produ.html

(5) see
http://www.concurringopinions.com/archives/2008/09/the_black_box_b.html

(6) see
http://www.concurringopinions.com/archives/2008/10/parasitism_inc.html

(6.5) For example, I think there were pump & dump schemes on Yahoo!
Finance.  The speed with which financial information is used makes it more
susceptible to gaming and manipulation than, say, a Wikipedia page.

(7) see
http://www.concurringopinions.com/archives/2008/09/on_the_simultan.html

(7.5) see, e.g., http://www.radicalcartography.net/?dependency

(8) see, e.g.,  http://en.wikipedia.org/wiki/United_Fruit_Company  ("The
United Fruit Company was frequently accused of bribing government officials
in exchange for preferential treatment, exploiting its workers, contributing
little by way of taxes to the countries in which it operated, and working
ruthlessly to consolidate monopolies.")

(9)see
http://www.concurringopinions.com/archives/2008/10/the_manicures_d.html

On Sat, Nov 1, 2008 at 1:26 AM, Michael Bauwens <michelsub2003 at yahoo.com>wrote:

> (an excerpt from the Ethical Economy book by Adam Arvidsson, sneak preview
> at www.ethicaleconomy.com)
>
> Ethics, Finance and Crisis,
>
> These might seem like three terms picked at random. However I would
> like to suggest that beyond its direct, contingent causes, the current
> financial crisis is a symptom of the emergence of a new economic
> system, where value is increasingly based on ethical factors, or on
> 'life conduct'. I call this an ethical economy: and I will try to
> explain why, and how it relates to the current crisis.
>
> The last 'Great Crisis' that lends itself to (imperfect) comparison
> with today's events was the Crisis of 1929 followed by the Great
> Depression of the 1930s. The Great Crisis was triggered by an
> over-valuation of industrial stock which had accelerated during the
> post-War boom of the 'roaring twenties'. Industrial profits, private
> savings (and borrowed money) were pumped into stock markets where stock
> prices were inflated. Like today this exuberance produced a situation
> where nobody really knew what the stocks were actually worth. Instead
> their value were related to the overall tendency of the stock market to
> keep rising. So the basic mechanisms behind the bubble and crash (like
> in all bubble crash and cycles) was the absence of a measure of the
> real value of stock, and its replacement by a self-referential measure
> that related the value of stock to the presumed future dynamics of the
> stock market itself.
>
> The post-War, Keynesian solution, which served to guarantee a
> relatively smooth financial development up until the oil crisis of
> 1973, and the following neo-liberal deregulation, was premised on the
> establishment and institutionalization of such a measure. This happened
> through the Fordist compromise between capital and labour, which
> institutionalized the productivity of industrial labour as the
> established measure of all economic values, including the value of
> stock. This establishment of an institutionalized measure happened
> through a democratization of the standards of value. Up until the
> 1930s, the people had no insight in the ways in which economic value
> standards were set. Instead such standards were set by a small minority
> of market operators who followed what we would today call a 'swarm
> logic'. With the Fordist compromise, popular representatives
> (principally the labour movement) came to have a say in determining
> what standards of values should prevail. This way these standards also
> acquired a wider democratic base, which made them enduring and robust
> as they now corresponded to what was a shared view of what constitutes
> 'real value'.
>
> Today, the dynamics leading up to the financial crisis are very much
> the same. We have seen an exploding share of immeasurable values that
> are capitalized on on financial markets (so called 'intangibles') and a
> generalized insecurity of the 'real values' of the assets that back the
> various kinds of securities that circulate. As a consequence, the
> credit and real estate boom that preceded the crisis was premised on a
> self-referential pricing mechanism: The value of a house was thought to
> be determined by the continuous upward movement of the housing market.
> Like in 1929, there is no democratic influence on how the standards of
> value for these kinds of assets are determined, and hence no way of
> guaranteeing that they correspond to a shared view of what constitutes
> 'real value'.
>
> But the today the assets are different form those of the 1920s. The
> most important assets in todays financial crack - mortgage-backed
> securities, credit card debt and many intangibles, like brand values
> are essentially securitizations of what we could call 'life conduct'.
> The value of a mortgage or of  credit card debt depends on the life
> conduct of the borrower. The value of a brand depends on the life
> conduct of consumers (this is actually what is measured in brand
> valuation schemes) and of the ethical conduct of the company that owns
> the brand; the value of a real estate market depends on the life
> conduct of  the inhabitants of a neighborhood or a city- after all this
> is what 'creative city' policies are all about. And to a large extent
> the productivity of a knowledge intensive company is about the
> life-conduct of its employees. So in many ways current financial
> markets build on the direct securitization of life-conduct, of
> ethically coherent forms of life. Swiss-Italian economist Christian Marazzi
> pointed this out long ago. Looking at the New York financial crisis of
> 1929, for many the origin of the neoliberal era, he showed how the
> privatization of city debt (through city bonds sold to the middle
> classes) gave a direct economic importance to the life-conduct of the
> poor. This, he argues, was the origin of the neoliberal era with its
> combination of freedom of private property and discipline for the
> propertyless.
>
> So the present crisis was preceded by a boom that built essentially
> on the securitization of life conduct, where the ethics of everyday
> life became a direct foundation of value. Like in the 1920s, however,
> the crisis resulted form a lack of rational measurements of the value
> of such forms of life conduct. What kinds of lessons can we draw form
> this?
>
> Many voices on the left (and on the right) speak of a severe
> restriction of the power and freedom of financial markets. This is
> probably not a good idea. There are many reasons that suggest that a
> financial distribution of value is in fact a functional response to a
> situation in which the production of wealth is thoroughly socialized
> and operates through the putting to work of social capital and what
> Marx called General Intellect, rather then through the direct
> deployment of labour time and private capital. In this sense financial
> markets serve to distribute a global surplus, which is essentially
> produced in common. What we need is a democratization of the standards
> of value. We need established, generally accepted standards for how to
> value forms of life conduct to underpin a rational valuation of the
> securities that they support. How can this be done? A centralized
> authority build around the state, like in the Fordist compromise is
> simply not possible. Furthermore, standards of life conduct are
> multifaceted, so that a rational measurement requires a multitude of
> points of view. This seems like a task for the collective intelligence
> of the networked multitude! My suggestion would be to use social media
> platforms that combine the functions of networking and rating. (These
> are already emerging, networking sites like Facebook are enormously
> popular; according to the PEW Internet and American life project in
> September 2007, 32 per cent of the US internet population had rated
> a person or product online) If E bay is able to give a rational and
> generally accepted value to the life conduct of its users (is the
> seller trustworthy or not?), then something similar could perhaps work
> for financial securities? Consumers, workers and other stake-holders
> involved in the globalized production of a branded commodity
> continuously rate the social impact of the brand. Their ratings are
> aggregated into an quantitative index that serves as an input for
> financial operators. When I go to the bank and ask for a mortgage I
> present a quantitative ethical index that summarizes what people in my
> networks think of my trustworthiness and general life conduct. That
> index affects the interest rate I would have to pay on my loan, and
> consequently the risk and price of the security that the bank
> subsequently derives from the mortgage An ethical economy? An Orwellian
> nightmare?
>  The P2P Foundation researches, documents and promotes peer to peer
> alternatives.
>
>
> Wiki and Encyclopedia, at http://p2pfoundation.net; Blog, at
> http://blog.p2pfoundation.net; Newsletter, at
> http://integralvisioning.org/index.php?topic=p2p
>
>
> Basic essay at http://www.ctheory.net/articles.aspx?id=499; interview at
> http://poynder.blogspot.com/2006/09/p2p-very-core-of-world-to-come.html;
> video interview, at
> http://www.masternewmedia.org/news/2006/09/29/network_collaboration_peer_to_peer.htm
>
>
>
>
> _______________________________________________
> iDC -- mailing list of the Institute for Distributed Creativity (
> distributedcreativity.org)
> iDC at mailman.thing.net
> https://mailman.thing.net/mailman/listinfo/idc
>
> List Archive:
> http://mailman.thing.net/pipermail/idc/
>
> iDC Photo Stream:
> http://www.flickr.com/photos/tags/idcnetwork/
>
> RSS feed:
> http://rss.gmane.org/gmane.culture.media.idc
>
> iDC Chat on Facebook:
> http://www.facebook.com/group.php?gid=2457237647
>
> Share relevant URLs on Del.icio.us by adding the tag iDCref
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://mailman.thing.net/pipermail/idc/attachments/20081102/55682996/attachment-0001.htm 