Fairness, not Capitalism, is the Issue.

Even though this article is from The Guardian, I could not have said it better.

Let me highlight a few paragraphs..

Plato first argued the case for proportionality – and it is telling that justice in so many cultures is signified by a pair of scales. Retribution should be proportional to the crime. But so should reward be proportional to our extra effort. It is a fundamental part of human beings’ hard-wiring. The scales symbolically declare that justice is getting our due and proportional deserts.

Functional societies require a high degree of fairness, unless the society is in a period of high growth (USA 1960- 1970). Barely functional violent societies can exist, but they are will either not last long (western roman empire) or not go anywhere (india, china, japan).

The irony is that capitalism if it is run properly is a means for people to get just that. If they are brilliant entrepreneurs or innovators then it is fair that they should get their proper due desert and make considerable if proportional profits. In fact, inventions are never the result of one individual light bulb moment but the consequence of a lot of social and public investment. Thus a proportion of the profit should go to the state as taxation, as its due desert for having collectively invested in the infrastructure and cumulative stock of knowledge from which invention draws – not least so it can repeat the exercise for the next generation. But the big point is that big rewards are justifiable if they are in proportion to big efforts – because big effort grows the economic pie for everyone. Profit is ethical to the extent it is proportionate to effort and not due to good luck or use of brute power. Taxation is ethical to the extent it is proportional to what the state has collectively provided.

Society depends on most people following the rules, without coercion. But people will not follow rules that are highly unfair, and coercion has its limits.

Few capitalists think like this. Instead they like to characterise themselves as individualistic hunter-gatherers, being able to eat what they kill – and if they kill more than the next man or woman, they get to eat more. My property is my own because I and I only have sweated my brow to get it; I have autonomy over it and no claim to share it, especially by the state, is legitimate. This is the cult of the investment banker or financial trader out to cut the next big deal or be a nanosecond faster than his or her competitor to buy or sell some financial instrument. It is only fair, they argue, that half a bank’s revenues should get paid out in bonuses after each year’s trading. The hunter-gatherers have to divide the kill once a year – and the annual bonus-fest is a kind of primitive celebration of their prowess.

Greedy people like to rationalize their greed.

But not even hunter-gatherers hunted alone; they worked in packs and teams. And we also know that they quickly worked out the role of luck in being successful They might not find animals to kill, not because they were not good hunters but because unaccountably there were no animals to kill. But if they returned to the cave empty-handed they would expect to share in some other hunters’ kill. Co-operation and a fair hand out of the spoils was an essential part of the hunter-gathers’ existence – if only for survival’s sake. The primitives knew that if you don’t run an economy and society fairly it quickly becomes dysfunctional, but this is not part of today’s banker worldview or culture.

Capitalist like to say they are clever when they are merely lucky.

Moreover the trading in money is not so much more valuable than any other form of economic activity that it deserves such privileges. This is not God’s work. It is an old-fashioned rigged market by a bunch of smart insiders who have managed to get away with it for decades because hard questions were never asked about fairness or proportionality. And to add insult to injury, when the sky fell in on what was a gigantic Ponzi scheme it was governments, backed by ordinary taxpayers, that launched a bail out to save the economy – but in the process also bankers.

Rigged systems can exist as long they do not overextend themselves.

Of course, intellectual mistakes were made about risk management techniques. Assumptions were made about economic behaviour that proved wholly wrong. But at the heart of the financial crisis – and the criticism of the recovery – lay disregard for fairness. The bankers cast themselves as hunter-gatherers who owed nothing to anybody and could eat what they killed careless of tomorrow. Banks carelessly ran down the capital at the core of their balance sheets, not replenishing and adding to it – but paying it out in dividends and bonuses. If they had paid out just 20% less, calculates the Bank of England, between 2000 and 2007 they would have reserved more than the state paid out in bail-out capital.

The problem is hubris, even more so than greed.

Bankers understood none of this then, and little of it now. They have a tin ear to fairness. But that was the consequence of allowing markets to be as rigged and jerrymandered as the financial markets have been – with no leverage caps, no rules on derivative trading, easily circumvented rules on capital and an anything-goes attitude to financial trading. Capitalism was run abusing all the principles of fairness. When cave dwellers were unfair, they died. When capitalism is unfair, we have financial crashes. Ethics and justice, it turns out, are the indispensable values to underpin successful capitalism.

We are soon going to find out how that story ends.

Any thoughts?

  1. February 26, 2010 at 11:26 am

    What a load of bollocks. Capitalism is not fair because life is not fair. If you ever have to participate in a legal trial you will learn that very quickly.
    —-
    If you live by the sword, you must learn to accept that you will die by it.

    There was once a movement of people who wanted to make sure that all things in life were distributed “equally and fairly”. They called themselves “Communists”. They boasted of a new world in which the government would regulate everything for the benefit of all.

    ‘Fair’ is not the same as ‘Equal’. Few people begrudge Steve Jobs, The Google Guys, Toyoda, Ford or the founders of Intel. They PRODUCED something!

    Their society collapsed, but a few of them went on to found a newspaper called “The Guardian”.

    I am not a big fan of that paper either, but this article is bang on.

  2. Russel
    February 26, 2010 at 1:44 pm

    The fact that bankers/traders were able to hijack the political system to cover their losses is the real problem.

    Bingo! We have socialism for the rich and capitalism for everyone else.

    Such an arrangement cannot work for long in the type of world we live in. It could have worked well a century ago, and to some extent even 30 years ago. We have a few systemic changes that those people did have to contend with such as top heavy demographic profiles, feminism, massive and global industrialization, long and complex supply chains, the internet, cheap and widespread AV communication, defacto fiat currency and GENERAL LOSS OF FAITH IN THE OLD SYSTEM.

  3. February 26, 2010 at 4:55 pm

    Absolutely spot-on. Why aren’t institutions like Goldman-Sachs being burned to the ground by angry mobs?

    It took repeated bad harvests, financial collapse and lots of general misery to start the french revolution. But most nobles lost their heads once it started.

  4. February 26, 2010 at 9:46 pm

    I guess nobody wants to remember that you all owned mutual funds that profited from the actions of these companies. I didn’t hear anybody complaining about Wall Street greed back when the economy was doing well and everyone was making money.

    I don’t like hearing about financial CEOs getting multi-million dollar bonuses any more than the next guy, but eviscerating the profit motive through burdensome regulation is no improvement.

    That money never existed, and when average people find that out more than a few will lose their heads. People love to get into ponzi schemes, but hate the founders when such schemes collapse.

    Financialism is the problem, not the solution.

  5. March 1, 2010 at 7:42 am

    If you think mutual funds are a Ponzi scheme, then you understand neither. “That money” absolutely existed; had you sold your stocks at the right time, you’d have it in your pocket today.

    Look at the demographic profile of the west and the economic model (assumption of infinite accelerating growth and zero sum optimization).

    The recession was not caused by insufficient government interference in the market, but the opposite. Politicians passed laws that incentivized lenders to set aside good judgment and give out unwise loans because it was “unfair” that people with lousy credit and insufficient income couldn’t live the good life. Then everyone was surprised when the people who could never afford those loans defaulted.

    And what about banksters who gave them that money? Should they be bailed out?

  6. March 2, 2010 at 1:01 pm

    No, I agree that banks should be held accountable for their mistakes. And no, the American economic model does not assume “infinite accelerating” growth. If anything, it assumes a cycle of growth and recession, though I guess they don’t teach that in schools anymore.

    Who is going to hold the banks accountable? and how?

    The ponzi model we live in assumes a trend of infinite accelerating growth in the same direction as before.

  7. March 2, 2010 at 5:07 pm

    “The ponzi model we live in assumes a trend of infinite accelerating growth in the same direction as before.”

    Simply restating something doesn’t make it true. I don’t know anyone in the real economic world who makes that assumption, and they wouldn’t hold down a financial job very long if they did – except maybe at the GAO.

    The only prerequisites for having a job in finance is the willingness to scam people with phony numbers and sophistic predictions.

  8. tehag
    March 5, 2010 at 8:06 pm

    The quotes from the Guardian article keep using the world ‘proportionality.’ They seem to think it means ‘equality,’ or rather that if A is proportional to B, then A=B. I believe in proportionality. Especially in punishment. If a criminal robs me of $10, the criminal should pay back $10,000. I if lose a week because of a crime, the criminal should serve 1,000 weeks in punishment. And so forth. It’s proportional: 1,000 to 1, and therefore has proportionality.

    As I recall, my definition is close to that of Plato, though he used a lesser ratio. The trip through the afterlife in the Republic was, what, about 20 to 1; and if the criminal (say, a tyrant) as especially bad, proportionality demanded he *never* be released from the underworld.

    It is obvious that you do not want a functional world.

  9. tehag
    March 5, 2010 at 8:14 pm

    “Taxation is ethical to the extent it is proportional to what the state has collectively provided.”

    Amusing theory. Wrong, of course, but were it correct this would definitely call for a dramatic lowering of tax rates worldwide, to what, less than 0.1% of generated wealth. Refunds galore!

    So how has the lowering taxes worked out so far?

    “My property is my own because I and I only have sweated my brow to get it…”

    It’s true, I am sick of multi-millionaire artist and musicians. Entertainers think they’re worth millions ’cause they wrote a book, or sang a song, or said some words in movie. Disgraceful. Such people make millions unfairly and non-proportionally. Confiscate all wealth of entertainers beyond minimum wage.


    I would rather have a multi-millionaire artist or musician than a rich banker, as bankers are rent-seeking parasites.

  1. February 27, 2010 at 9:06 pm

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