Finance in Parrot Talk, Part I

I call “parrot talk” the loud and relentless repetition of some plausible fallacy that is first launched as an original and debatable notion by some minor authority or small group, often with an axe to grind, and then, by a mysterious process of perverse selection, is taken up and hammered home by public intellectuals and the media, triumphantly becoming a firmly established truth. When used as prophecy or forecast it is liable to be self-fulfilling. When used as explanation and diagnosis, it dictates the remedy. In either case, it is capable of causing deep and lasting damage in political thought and the public policy the thought tends to shape.

In the present column and the one next month I will be dealing with a few particularly insidious and dangerous subjects of parrot talk. I will first recall a few that I had identified in earlier writings. Then I will present some more recent untruths, such as the idea of “financial capitalism”, the supposedly vital need, to stock up the banks with extra capital, monetisation of the debt, and the alleged vices of modern capitalism, such as speculations and short-termism.

Fundamental Fallacies2

Among my Collected Papers there is an essay entitled “Parrot Talk.”3 It treats a number of fallacies in political philosophy that, looking plausible and pleasing to most people’s ears are being repeated on every possible occasion with an air of assured conviction. Each time they are declared, more academic parrots take them up and relay them in ever wider circles until they become ineradicable common knowledge that feeds prevailing political thought.

One of these fallacies, pilloried in “Parrot Talk,” is the separateness of production and distribution. The gross national cake is first baked according to the laws of economics, and then sliced and distributed according to the collective decisions of society. It remains unsaid that the very reason why a cake of a certain size is baked at all (rather than a sweeter, bigger or smaller one or indeed none) is that its distribution will be of a certain kind and not a different one. Income is not a grabbed and redistributed with impunity without reacting back on production.

Another fallacy, often repeated to reassure the voter called “liberal” in English English that he has little to fear from the candidate called “liberal” in American English, is that it is possible to bring about equality of opportunity without enforcing equality of outcomes. It takes a minute of extra thought to realise that once preceding outcomes are allowed to be unequal, current opportunities cannot possible remain equal.4 But this extra minute of thought is suppressed by the rising noise of parrot talk. Finally, the essay notes that the most widely accepted modern theory of justice lays down, as its first principle, that everybody must have a right to the greatest possible liberty compatible with the same liberty for everybody else. One may ask why having a right to liberty is better, or different, than having liberty itself. Adding the “right to” should raise suspicious second thoughts, or perhaps it is just empty verbiage—but having a right always sounds nice, and passes well in parrot talk.

Must Safety-First Economics Prevail?

What the earlier “Parrot Talk” essay sought to do in political thought, the present one aims to do in the current language parrots use about finance. It is written by taking as read certain well-established theses of neo-classical economics that are basic to what in English English is called “liberalism”.

Thanks to incessant repetition in the last few years, public opinion is now convinced that risk is a bad thing and ought to be purged from the economy as far as possible. Economics, on the contrary, teaches that some risk is inevitable because the future is not predictable, and necessary for efficiency. The size and severity of risk and its price should and under a regime of free contract would adjust to each other. The wish to avoid risk by paying the market to bear it (e.g. by hedging, forward dealing or insurance) would, in equilibrium, be equal to the willingness of the market to assume that risk. This situation is an optimum, because neither the marginal risk-avoider nor the marginal risk-bearer can expect to do better by moving away from it. The spectacular stock and bond market losses of 2008-2009 showed that the expectations of large operators, such as the insurer as AIG, may occasionally be spectacularly wrong (especially if biased by existing regulations and Fannie Mae activities, as was the case in the U.S. residential mortgage market), but they did not invalidate the theorem. The losses were the outcomes of zero-sum games and as far as one can tell, they involved no destruction of tangible value. As Milton Friedman would say, for every loser, there was a gainer. Damage did occur due to massive mismanagement of the shock waves, but not because risk was allocated by price in the first place. After all the ensuing parrot talk, the received truth now is that risk is bad and almost reprehensible and should be purged from the system. Poor system! Risklessly, it would be heading for an unpromising future.

The condemnation of risk and particularly of its assumption by professional risk-bearers has become a rock-solid dogma. It is not the only one that is firmly believed because everybody else seems to believe it and is saying so. The over-arching untruth that assiduous parrot talk is converting into a new truth is that the freedom of contract, the basic enabling condition for allocative efficiency in the economy, is “all right in theory but does not work in practice” and needs to be limited and regulated in an ever larger variety of sensitive contexts, many of them in finance. Loses made by any lame duck industry must be doctored because they are obviously bad things. Finance attracts the curiosity of the busybody because its techniques are ill understood and it is shrouded in an air of mystique and power.

“finanzkapitalismus”

German parrot talk has achieved the feat of uniting in a single word two of the most hated ideas that in other current languages would take two or more to express.

There must be some people, though not very many, who would be happier as cavemen or nomadic herdsmen battling periodic famine and the cruelty of elements than denizens of our urban civilisation. For the rest of us, however, the populist dreams of abolishing the “dominance of money and the dictatorship of the market”, as well as seeking “production for real needs, not for profit” should and can be dismissed as irrational ranting. It would be rational if we harboured a strong streak of masochism that could best be satisfied by self-inflicted economic and social pain.

At a more sophisticated level than masochistic oratory, a few standard accusations are obstinately levelled against finance, capitalism or both. Often no distinction is drawn between the two, which can be excused on the ground that finance and capitalism have flourished together and though each can be imagined without the other, the result looks painfully contrived. Quantitative economic planning by input-output matrices, on the one hand, and market socialism on the other, are examples of such contrived monstrosities. You can perhaps run an economy without prices set in a single money of account, but it looks hardly promising. You can perhaps run a money economy while suppressing the profit motive, but it looks unpromising, too.

The steady stream of parrot-talk charges come under two headings. One is morality. Capitalism is immoral because it promotes immoral or at best amoral conduct in pursuit of a morally worthless objective, profit. It also generates inequality of material conditions among men, and relations of subordination. It is not realised that all economic systems, except perhaps subsistence farming, do these things and have done so through history. Where capitalism is superior to its real or putative alternatives is in its relation to morality. It is the only system where the optimal rule to follow in order to achieve success is “honesty is the best policy”, ( though following a rule is not the only or necessarily a better road to success than not following one). Capitalism, as has been recognised by the more intelligent among its defenders, systematically economises morality: it needs less of it than other systems in order to function properly. It achieves more with morally fallible human agents than in other systems could hope to do by relying on the scarce supply of clean-handed, selfless, public-spirited people they could find. Capitalism shrinks the opportunities for corruption, pre-capitalist and socialist systems open them widely.

Under the less high-minded heading of stability and efficiency, parrot wisdom, particularly since the mayhem of 2008, has it that an excessive financial superstructure renders the economy top-heavy, crisis-prone and badly in need of re-regulation after the decades of doctrinaire free-marketism of the latter part of the 20th century. This charge, for all its plausibility with bank rescues and stubborn unemployment weighing on our minds, is nevertheless an arbitrary one. The capitalist economies and in particular their financial service sectors prior to 2008 were too lightly regulated in the view of some, too heavily in that of others. They were in either view hybrids. There is no earthly way of telling, from the performance of a hybrid system, what the performance of a pure system would have been. Maybe putting the banks in straitjackets would have averted 2008, maybe setting them really free to swim or sink would have done it. Maybe neither would have made much difference. But pretending to know that more regulation was needed, as Mr. Volcker, Mr. Mervyn King, Dodd-Frank legislators and the Basel committee do and as incessant parrot talk to the same effect raises to the rank of a self-evident truth, should not be allowed to serve as an argument-stopper.

Probably the best French current affairs commentator exclaimed the other day that every day hundreds of billions of money transactions flow through the exchanges without the least attempt by governments at regulating them, and this was truly terrifying and inadmissible. She might as well have added that every day hundreds of billions of hectolitres5 of water slosh about in the oceans without the least attempts by governments to regulate them, and this was truly inadmissible and terrifying.