Saturday, March 15, 2008

Selflessness to Blame for Recession

The Toronto Star attempts to twist reality to fit it's ideology:

As is well known, Adam Smith, the 18th century author of that groundbreaking economic treatise, The Wealth of Nations, decreed that the motivating force of economic growth was selfishness.

The desire of businessmen and shopkeepers and entrepreneurs to make money benefited everyone, he argued, because others picked up part of this extra money in the form of jobs or sales or whatever.

Less well known is that Smith himself assumed that selfishness was self-regulating, or at least had some decent limits.

In a second book, The Theory of Moral Sentiments, now little-read but that Smith himself regarded as the more important one, he wrote: "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him."*

Would that Smith were right. But he wasn't.

...

This recession, if confirmed, will be unique. It will have been caused by selfishness unconstrained by any of the moral sentiments Smith thought would act as a brake on social destructiveness.

Oh hum. Another day in Red Toronto. We're even seeing the same insipid arguments - sorry, smears being trotted out with a new coat of paint to hide the rust:

Thus, Merrill Lynch CEO Charles Prince walked away after being dismissed with $161 million, including $38 million in a bonus and stock options, at the same time as his company lost $10 billion.


Hello, envy, my old friend! It's another "zero sum" fallacy rearing it's ugly head, once again seeing the economy as a concrete pie, rather the amorphous, increasing blob that it really is. Ever wonder what the phrase "to make money" actually means, Gwyn? Yeah, I didn't think so.

I'm sure this will be a familiar refrain, but does the author of the Star's piece, Richard Gwyn, offer any - what's the word? Oh yeah: proof to back up his assertion that it was selfishness that caused the recession? Nope. Not one fucking iota of evidence is given to back up his claim. The article is impotent, its thesis stillborn, its words just random noises: gutteral screams from the throat of a recently beheaded turkey.

Since Gwyn hasn't bothered to look for facts before adopting a position, allow me to show him how it's done.

If anything, when I saw the headline, I knew that I would be able to refute whatever dreck this wretch was going to present, but I was expecting him to at least blame it on the selfishness of the people who realized that they were suddenly free to grab all of the low-interest loans they could, loans that they would never be able to afford were it not for government intrusion into the market in the first place. But for a writer on the staff of the Toronto Daily Worker, he couldn't even admit himself to say that much: he had to insinuate that it was the fatcat CEOs, making their billions while somehow screwing the economy by handing out what has now become free money, that were the problem. It takes a lot of twisting and covering of the eyes to achieve this one, folks. It also takes a lot of cowardice to use the words "selfishness" and mention how much CEOs are getting paid, without actually coming out and saying that he thinks the fact that somebody, somewhere, is actually being paid is the problem. If that's the problem, Dick, why don't you just come out and say it? If it's true, you can defend it, right?

What Gwyn hopes to evoke with his use of the word "selfishness" is what Ayn Rand identified as the "intellectual package deal:" (from The Virtue of Selfishness)
In popular usage, the word "selfishness" is a synonym of evil; the image it conjures is of a murderous brute who tramples over piles of corpses to achieve his own ends,who cares for no living being and pursues nothing but gratification of the mindless whims of any immediate moment.

Yet the exact meaning and dictionary definition of the word "selfishness" is: concern with one's own interests.

The concept does not include a moral evaluation; it does not tell us whether concern with one's own interests is good or evil... it is the task of ethics to answer such questions.
Gwyn hopes that the minute you hear "selfishness" your brain will shut down, and you'll come up with all the marvelous things you thought he said, even though he hasn't said a goddamn thing. Then, you'll be ripe for the picking of the next politician who comes along promising to curb corporate "greed."

Back to Gwyn's article:
Committee chair Henry Waxman observed, "It seems that CEOs hit the lottery when their companies collapse." Prince and the others explained the bonuses were for earlier performances, and could not be ratcheted back.

Now, I could point out how Congressmen like Henry Waxman continue to earn their salaries while the entire country goes to pot, but I prefer to present facts, and not rely on envy to get people on my side. I will, however, take great delight in saying that this is the same Henry Waxman who masterminded the intrusion into Major League Baseball's privacy, taking a particularly sadistic interest in a man greater than he'll ever be, drug use or not: Roger Clemens.

The fact of the matter is that it was government altruism, not the selfishness of the bankers that caused this mess.

Alex Epstein, of the Ayn Rand Institute, provides a nice metaphor, prompted by Fortune Magazine's assessment of the situation:
Every few days we hear that another leading financial institution has written down billions more on subprime investments gone bad. Nearly every major financial institution, it turns out, had a hand in loans to low-credit borrowers—borrowers whose ability to pay often hinged on endlessly low interest rates or a strong housing market. How could this happen? How could nearly all the leading lights of the financial industry—the experts in assessing and managing risk—expose themselves to such massive losses? Or, as a Fortune cover crudely put it: "What were they smoking?"

A major part of the answer is: government bailout crack.


He continues:
For decades our government has had a semi-official policy that large financial institutions are too big to fail—and therefore must be bailed out when they risk insolvency—a policy that creates perverse incentives for them to take on far more risk than they otherwise would. "Too big to fail" is implemented through a network of government bodies that protect financial institutions from the long-term consequences of their decisions at taxpayer expense—a phenomenon we can observe right now.

Gwyn's slap to the face of Adam Smith in the Star's article is thus returned with the dueling glove: selfishness is self-regulating, tempered by the little-used device called reason. It was not reason that failed; in fact, the banks were acting in full compliance with it. If you know that there aren't going to be any consequences for ill-conceived actions, why would you even hesitate to dive in? If someone has taken the care to make my car out of an indestructible, invulnerable material, do I have any reason to drive safely? Fuck no; I, and my car, are going to be fine no matter what I do! To provide a more down to Earth example, I live in an apartment building: the utilities are included in the rent, and the rent is carefully controlled by the government, even though the price of utilities are not. I, therefore, have no incentive to conserve electricity: I pay the same regardless of how many appliances I run all damn day. Adam Smith opposed such controls because he was an advocate, right there in the damn quote if Gwyn had been bothered to understand it, of rational selfishness .

Rational selfishness acts like Adam Smith's invisible hand in the market. A man isn't going to charge 2000 bucks for a loaf of bread because the government threatens him with jail if he does so. He doesn't do that because it is irrational. No one is going to pay $2000 for a loaf of bread, because they can always make their own bread, buy bread from another bakery, or just go without bread. Then, Mr. Irrational Prices would have to lower the value he places on his bread to a reasonable point - the point at which people are willing to buy it; the point at which he can make the most money, not because he is charging the most, but because the most people are buying his bread.

Now, imagine, that your customers can purchase your expensive bread on credit, and that the government will bail him out when he realizes that he'll never have the $2000 per week that's required to keep his belly full of bread. Your customer's not going to stop buying pastries; he's got a "lifeline." You, certainly, aren't going to stop making bread: you're making - pardon me - dough hand over fist.

So the government prints more money to make the payments to you, the breadmaker. And suddenly, that $2000 isn't looking like such a good price anymore. Now, replace "bread" with "home," and you'll see what I'm getting at here.

Now, imagine if it was the government who made bread cost $2000 a loaf, as genius Thomas Sowell explains:
But why were housing prices going up so fast, in the first place? A number of studies of communities across the United States and in countries overseas turned up the same conclusion: Government restrictions on building. While many other factors can be involved -- rising incomes, population growth, construction costs -- a scrutiny of the times and places where housing prices doubled, tripled, or quadrupled within a decade shows that restrictions on building have been the key. Attractive and heady phrases like "open space," "smart growth" and the like have accompanied land use restrictions that made the cost of land rise in many places to the point where it greatly exceeded the cost of the homes built on the land. In places that resisted this political rhetoric, home prices remained reasonable, despite rising incomes and population growth.

Construction costs were seldom a major factor, for there was relatively little construction in places with severe building restrictions and skyrocketing home prices. In short, government has been the principal factor preventing the "affordable housing" that politicians talk about so much. Politicians have also been a key factor behind pushing lenders to lend to borrowers with lower prospects of being able to repay their loans.


Does it still look like that selfish baker - err, banker is to blame?

Smith, in a line apparently missed by Gwyn in his reading of The Theory of Moral Sentiments, says "We may often fulfill all the rules of justice by sitting still and doing nothing." Indeed, that is precisely what the government should have done back when there wasn't a problem in the first place.




* Gwyn couldn't even get this much right: The Theory of Moral Sentiments was actually published before Smith's Wealth of Nations, and was given an extensive revision shortly before his death.

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1 Comments:

Blogger Andrew said...

It would be rationally selfish of us to demand that the bankers be fired and jailed. As a message to anyone who would take advantage of a similar situation in the future.

After all, they can't blame us for looking out for our own interests.

August 25, 2008 at 10:00 AM  

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