The Limitations of “Rot”

Posted on Categories Business Regulation, Political Processes & Rhetoric

I was going to do this as a comment to Jessica’s post on Frank Pasquale’s post on the rot in America’s financial system, but it got a bit long, so I decided to make it a post.

Jessica cites to a post on Concurring Opinions which relies, to some extent, on a comment in response to a post that I wrote on Prawfs. It’s a small blogosphere after all.

There is much to be said in response to the Pasquale post (which I agree is provocative), but I want to focus on one part that Jessica highlights:

Can anyone doubt that our economy is exposed (with each passing day) as more Sicilian in its “winners’” casual acceptance of fraud, more Russian in its oligarchic tendencies, more Brazilian in its inequality?

Well, I think I can.

It is a natural human tendency to overemphasize whatever happened yesterday. But let’s take the financial meltdown as somehow emblematic of “our economy.” Over the past few months, I yet to read a convincing argument (as opposed to an assertions) that the problem was a result of fraud (although there certainly was some, as there will always be) or deregualtion.

One can always imagine regulation along the lines of “don’t do that again,” which will seem wise in hindsight. The one bit of proposed regulation that might have helped (reining in Freddy and Fannie) was opposed by the Democrats, who, in the words of Barney Frank, did not want “to raise safety and soundness as a kind of general type of shibboleth.” Another type – tightening lending standards – would have been dead on arrival.

Pasquale wants to say that a market economy does not recognize the ways in which wealth is commonly created. That’s not true. Markets (which are always a product of some form of regulation – they require rules) permit interaction for the creation of wealth by voluntary exchanges between participants.

The results may not always be what we would like them to be, and they are influenced by the existing distribution of wealth and talent. But, in the American context, no one really suggests that market forces should determine everything. Even over the last thirty years, government’s share of GDP has continued to rise, albeit only slightly.

Inequality is, I think, a problem, but lack of wealth can be a larger one. Pasquale quotes Patrick S. O’Donnell’s recitation of a a number of tenets of Catholic social teaching in response to a post of mine over at Prawfsblawg.

I disagree with none of them, although I think Patrick’s restatement of the idea of subsidiarity is incomplete; it is not simply about which level of government should do some thing. 

But to accept these aspirations is not to accept any particular way of accomplishing them. Nor does it imply any particular tradeoff between conflicting goals. To move substantially in the direction of a more statist society (at least as concerns the economy) would, I think, be a mistake that would disserve these principles.

Cross posted (with modifications) at PrawfsBlawg.

3 thoughts on “The Limitations of “Rot””

  1. Rick, thanks for a thought-provoking follow up. It is indeed a small blog world. I had no idea I was jumping into the middle of a debate with which you were already involved. Frank Pasquale’s post simply caught my eye, probably because I was already primed to agree with his sentiments.

    In some ways it seems needless for me to respond to your post, because I suspect that each of us understands where the other stands.

    Still, I guess I’ll quibble that I don’t think the quoted part meant (in my post or Pasquale’s) that fraud caused the problem. Instead, Pasquale’s post seemed to be suggesting that a shift in our society’s values to an acceptance of unregulated greed, acceptance of the pursuit of unlimited individual wealth as an end in itself, was at least part of the problem. And a cavalier attitude toward fraud seems likely to be correlated with an atmosphere in which pursuit of wealth as an end is accepted.

    With regard to increased regulation, the extent of my disagreement with you depends on what “substantially in the direction of a more statist society” means. I guess we could talk about that some other time, maybe at a blog committee meeting. 🙂

    I didn’t refer to the Catholic social teachings in Pasquale’s post because I tend to agree with you that they offer us inspiring aspirations but do little to resolve the question of how to achieve those goals.

  2. Jessica

    I’m afraid that Michael will keep us to the agenda at a blog committe meeting. He’s a stern task master!

    But he can’t stop us here. Nor would he want to.

    As far as the banks being bailed out, you might expect that I am not favorably disposed to the concept. I come from a private sector background in which bonuses are paid only when value is created. People can make good money but only when the enterprise prospers. I am not sure how they are using the term “bail out,” but, in the world I come from, if the company did poorly (which we defined as less well than a trailing average of the past few years), bonuses (which were calculated by a formula based on current and past results)got stepped on or eliminated.

    As I know you are aware, a defense of free markets is not tantamount to a defense of participants in the market. There are, I think, issues here that were raised in our discussion of Nadelle Grossman’s work on “short termism.” I worked in a privately held enterprise. While I don’t know that I agree with the remedies that Nadelle is currently considering, she is wrestling with a major problem.

    As for blaming a culture of unregulated greed and acceptance of unlimited pursuit of individual wealth, I guess I don’t find those ideas very helpful. First, I am not sure that it describes the society I live in. We moved, during the late 70s and 80s to a greater appreciation of what capitalism and innovation can do for us. I think the record there speaks for itself. But this hardly left us with a capitalism raw in tooth and claw.

    Since I believe that life is paradoxical, I’d be untrue to myself if I didn’t believe that all of this has a potential down side. Here I think that all sorts of conflicting impulses came together for trouble. We wanted to promote home ownership. Too much, We overvalue the type of academic credentials that dominate Wall Street and accept the notion that whiz kids from Harvard and Yale should get rich quick. Others actually have to produce something. We convinced ourselves that home prices would continue to rise because the alternative was unpleasant. We look the other way at the time honored rule of wealth accumulation in the legal profession (exploited by the plaintiffs’ bar just as the financial industry.) Be there when large amounts of money changes hands and take just a little. Alan Greenspan thought he could ensure prosperity through low interest rates. Congress thought GSEs could work magic. (Our current return to neo-Keynesian economics shares the same fault.)

    But this is a good discussion with more to be said. In particular, what are the appropriate legal responses?

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