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October 12, 2008
David Warsh, Proprietor


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A Riddle for These Times

The widespread craving for authority in the current crisis is not easily satisfied. Paul Volcker, who led the worldwide battle against inflation twenty-five years ago, still vigorous in his 80s, is one such figure who commands wide respect. Warren Buffett, the immensely successful investor (but no regulator), is another.

 

New York Times reporter Peter S. Goodman, in a remarkable front page-story last week about the rise of derivatives trading in the 1990s, invoked currency trader George Soros, investment banker Felix Rohatyn and Congressman Edward Markey as symbols of cautious wisdom, prefatory to laying out how in 1998, one month after the crash of Long Term Capital Management, Federal Reserve Board chairman Alan Greenspan, Treasury Secretary Robert Rubin, Deputy Treasury Secretary Lawrence Summers and Securities and Exchange Commission chairman Arthur Levitt teamed up to persuade Congress to ban regulation of the over-the-counter derivatives market  that had been advocated by Commodity Futures Trading Commission chairman Brooksley Born.

 

As potentially damaging as is that story to the reputations for sagacity of Greenspan, Rubin, Summers and Levitt, what it depicted in broad strokes was a commercial civilization in full cry, with the Clinton administration’s “Committee to Save the World” (as Time magazine described Greenspan, Rubin and Summers on its cover in early 1999) determined to exercise financial leadership and compete successfully in global markets, and devil take the hindmost.  Look for many more stories about the growth of the hundred trillion industry that sprung up after economist Wendy Gramm (wife of then-Sen. Phil Gramm) authorized OTC derivatives, in 1993 in virtually her last act at CFTC chair.

 

In the spirit of thinking back on watchdogs who warned us, let me resurrect another sage: Jane Jacobs, the citizen economist, philosopher, journalist and activist who died in 2006. In Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics, in 1992, she left behind a provocative set of clues to what went wrong.

  

First, however, at what is apparently the opposite end of the spectrum, note that the Nobel prize in economics will be announced tomorrow. One thing that seems certain is that the award won’t have any very direct connection with the current crisis. The laureate or laureates will be thrust into the spotlight, whether blinking or shining, to accept their fame, explain what they did, perhaps to write an op-ed piece for The Wall Street Journal, before retreating nearly as quickly to their studies to prepare for the string of congratulations, lectures and banquets.

   

That’s because Royal Swedish Academy of Sciences is still recognizing work done as long ago as in the 1970s. The economics Nobel – today technically the Bank of Sweden Memorial Prize in Economic Sciences in Honor of Alfred Nobel – has been invaluable in illuminating the landscape; but, because it was established only in 1969, and therefore had a considerable backlog with which to deal, the lags are long and variable.

 

(The discoveries celebrated by the hard science prizes also occurred well in the past. The first experiments in broken symmetries that led to the prize in physics were performed in the 1960s.  The fluorescent protein that won the chemistry prize was reported in 1962. The prize in medicine/physiology was awarded for work on the cervical cancer virus that was first postulated in the 1970s, and on the HIV virus, which was isolated in 1984.)

   

Interestingly enough, a new forum in economics is scheduled to come into existence next year that will make it easier for insiders and outsiders alike to keep abreast of recent developments in various fields. Since 1932, a non-profit science publisher with the deceptively bland name of Annual Reviews has commissioned volumes of critical reviews of the research literature, aimed at a worldwide audience of scientists, in a gradually growing number of disciplines.

 

Three surveys of economics are to be published for the first time next year, their tables of contents and authors ready for inspection on the Web. They afford a fascinating glimpse of what’s going on.  They are Annual Review of Economics, edited by Kenneth Arrow and associate editor Timothy Bresnahan, both of Stanford University;  Annual Review of Financial Economics, co-edited by Andrew Lo, of Massachusetts Institute of Technology, and Robert Merton, of Harvard Business School; and Annual Review of Resource Economics, edited by Gordon Rausser, of the University of California at Berkeley and associate editors Kerry Smith of Arizona State University and David Zilberman of the University of California at Berkeley. By themselves, the new surveys won’t change much at all in their first year. But they are clearly signs of continuing maturation of an increasingly global science.

 

Meanwhile, at the International Monetary Fund/World Bank meeting in Washington, the best and brightest policy economists from all over the world are gathered, along with finance ministers and central bankers, are engaged in a concerted effort to shock life back into normal lending among banks around the world.

 

Whether their meeting is remembered as more nearly resembling the successful 1815 Congress of Vienna or the disastrous 1919 Versailles Treaty is anybody’s guess. But the emergency conclave seems likely to go down as a historic turning point of one sort or another.

 

For all the hurly-burly, this is a good time to recall Jane Jacobs. Jacobs was nearly 75 when she began Systems of Survival.  The immense success of The Death and Life of Great American Cities (1961) was well in the past; so were the frustrations of her more analytical The Economy of Cities (1969) and the disappointment at the reception of Cities and the Wealth of Nations (1984).  She had nothing more to prove, so she wrote Systems in a manner that was more congenial to her — as a dialogue among half a dozen friends from different walks of life who meet on fourteen occasions to discuss various threats to the prevailing “great web of trust in the honesty of business.” It contains some of her most original and provocative thinking. But Systems is not easy to digest, and the book has not yet gained the audience it deserves.

 

“This is no novel,” says the fictional Armbruster near the beginning. He is a publisher who convenes the sessions. “This is a tradition older than the novel. Dialogue – didactic talking heads, if you will – goes back to Plato and possibly to the dawn of consciousness about right and wrong, whatever that was.  The form – disagreements, speculations, second thoughts, questions, answers, amended answers – it’s suited to the problematic subject matter.  Let’s give it a try?  What harm can it do?”

 

Let me state the riddle with which the book begins.

 

Armbruster begins by asserting that he has identified two characteristic modes of human activity that have evolved over time, taking and trading, two contradictory way of making a living, therefore to two quite different moral and value systems, often contradictory, which now exist side by side. Instead of naming them, he lays out various precepts for admirable behavior (or avoidance of scandal) identified with each that he culled from his reading over the years.

 

Moral Syndrome A

Shun force

Come to voluntary agreements

Be honest

Collaborate easily with strangers and aliens

Compete

Respect contracts

Use initiative and enterprise

Be open to inventiveness and novelty

Be efficient

Promote comfort and convenience

Dissent for the sake of the task

Invest for productive purposes

Be industrious

Be thrifty

Be optimistic

Moral Syndrome B

Shun trading

Exert prowess

Be obedient and disciplined

Adhere to tradition

Respect hierarchy

Be loyal

Take vengeance

Deceive for the sake of the task

Make rich use of leisure

Be ostentatious

Dispense largesse

Be exclusive

Show fortitude

Be fatalistic

Treasure honor

Neither list was internally contradictory; each followed a logic of its own. What to call the syndromes, then?  That was the heart of the riddle. Armbruster sought to associate various occupations with each. A few occupations seemed to embrace both – private law practice, for example, or agriculture.  But most clearly belonged in one camp or another.

 

Syndrome A was easy to type.  The occupations associated with all had to do with commerce –with producing goods or services and, also, much scientific work.  Call it the commercial moral syndrome, Armbruster told his colleagues, or bourgeois, if they preferred.

 

Syndrome B was more enigmatic.  Armed forces and police, aristocracies and landed gentries, government ministries and bureaucracies, monopoly trading companies, law courts, legislatures, religions and, especially, state religions:  what do they have in common?

 

“It finally struck me.  They are all concerned with some aspect of territorial responsibilities. The condition is the work of protecting, acquiring, exploiting, administering, or controlling territories.”  In other words, with government. Call it the guardian moral syndrome, Armbruster suggested, borrowing a term from Plato.

 

All the rest of Systems of Survival is an inventive and high-spirited speculation on how these two approaches, commercial and guardian, collide and interact in the modern world. “[M]any of us have taken on casts of mind so skewed toward one set of morals and values that we have little understanding of the other, and little if any appreciation of its integrity too,” Jacobs writes in a brief preface — an especially helpful observation to remember in the present situation. There’s not much that escaped her attention – from global warming to national security to greed and fraud in business.

 

This basic distinction that she draws is best understood, I think, as simple common sense. It also happens to be the province of one of the most interesting emerging fields in all of social science, the discipline known as evolutionary psychology. For a prime example, see “The Origin and Evolution of Religious Prosociality,” by Ara Norenzayan and Azim F. Shariff, both of the University of British Columbia, in the October 3 issue of Science, in which the authors review converging evidence from several fields on the proposition that religions facilitate acts that benefit others at personal cost.  

 

The current crisis, however, is clearly one of those times when we can’t wait for science to catch up to common sense. Once the job of emergency repair of financial institutions has truly begun, our attention should shift to a thoughtful rebalancing of spheres of influence in American society, with the balance shifting more toward the guardian.

 

This is not a matter of Republicans and Democrats; it goes much deeper than that. But then, neither is it rocket science. For openers, don’t look for Goldman Sachs executives to play a prominent role in the next administration.  

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