[iDC] The ethical economy and the current financial meltdown

Mon Nov 3 21:35:36 UTC 2008

Dear Frank,

Many thanks for this very thoughtfull contribution, which advances the debate. May I republish this on the p2p blog?

I'm not an expert, but just from my experience: I think that direct financial evaluation of reputation in communities won't work. Reputation is very hard to truly measure, and measurement schemes themselves often induce competitive behaviour (i'll scratch your back if you'll scratch mine, i.e. mutually beneficial recommendations a la Linked, the race for financial resources which marred the omydiar network, etc...). Loose general schemes like slashdot may work, but only because they are not tied to many real financial advantages.

So, building a financial expectation remuneration based on the already shaky ground of reputational schemes, is like bringing two shaky foundations together.

What I think we need is the following:

- guaranteed revenue schemes and transitional labour market policies which allow people to more generally plan their moves in an out the market

- general institutional support for peer production and social innovation, Institutes of the Commons and Open Business Incubators that, in their respective 'subject fields' (like free software), support generalized benefit sharing practices by businesses benefiting from the commons, support and fund infrastructures of cooperation, support of open business models. I'm adding my idea of a triarchy of public institutions at the bottom

- public patronage schemes for a posteriori rewards, prizes, fellowships, to support proven contributions

 Details from http://blog.p2pfoundation.net/public-surpport-for-value-creation-through-the-commons-4-principles-and-3-institutions/2008/07/17

Here’s my proposal, a set of 3 interlocking institutions, each with its own complementary mission and objectives:

1) Institute for the Protection and Development of the Commons

This is an institution that effectively supports the creation and maintenance of the commons, 

A) by diffusing knowledge about the legal and institutional means of creating and protecting them.
B) by creating a supportive infrastructure of cooperation that
facilitates the creation of commons-oriented initiatives by those who
have more difficulties accessing such necessary infrastructure

Example: the policies of the French city of Brest, led by Michel Briand

C) by maintaining relations with, and supporting the operation and
maintenance of the for-benefits institutions that are most often
associated with commons oriented initiatives

2) Institute for Open Business

This institution supports the creation of market value in
cooperation with the Commons, in ways that are compatible and do not
deplete commons-based value creation. Typically, this is the kind of
Institution that would support open source software businesses, open
textbook publishers, etc.. and support young and starting enterpreneurs
who want to engage in such.

Example: the OSBR.Ca in Toronto

3) Institute for Benefit-Sharing and Commons Recognition

This institution focuses on patronage and various forms of support
that do not destroy the peer to peer logic of voluntary contributions.

A) It creates a priori prizes, awards, bounties to support individuals involved in commons-based value-creation
B) in cooperation with the companies (stimulated by previous open
business institute), it stimulates benefit-sharing practices from
companies that profit from commons created value. It acts as a
meta-regular for such practices, identifying weak spots and stimulating
solutions for them.
C) it creates a posteriori patronage arrangements for individuals with a proven record in commons-based value creation
D) it studies and proposes policies for the overall stimulation of commons-based value creation

________________________________
From: Frank Pasquale <frank.pasquale at gmail.com>
To: Michael Bauwens <michelsub2003 at yahoo.com>
Cc: iDC list <iDC at mailman.thing.net>
Sent: Sunday, November 2, 2008 10:57:37 PM
Subject: Re: [iDC] The ethical economy and the current financial meltdown

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

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