Archive: Oct 2008

That’s funny, I thought the Saxon aristocracy was using LORAN. [rimshot]

Snapped near the Museuminsel in Berlin.

One of the best bumper stickers I ever saw was on a red Chevy truck in Northern California about 15 years ago: it read, “In case of Rapture, this vehicle will be unoccupied.” That slogan came to mind following the uncanny confluence of God and Mammon in America in recent weeks. First we got a Vice-Presidential candidate, Sarah Palin, whose Pentacostal faith includes belief in the Rapture, in which God takes all the “elect” (those “saved” by belief in Jesus Christ) into heaven, leaving behind the “unrighteous” to suffer the throes of the world’s end. Next we got hit with the Economic Apocalypse, in which some of the “elect” (like A.I.G.) got raptured into the heavens of solvency, while the rest of us have been left behind to gnash our teeth and rend our garments, tormented by a plague of foreclosures and bankruptcies. Coincidence? You decide.

Living as an expat in Germany, I get a lot of questions about Americans’ behavior. Most recently, I’m being asked why we accept the selective bailout of some failing businesses—many of which have appear to have brought about or hastened their own demise with irresponsible debt—while the vast majority of us will receive no assistance at all. It seems particularly galling to these European observers that our political leaders scold us for our bad financial habits, then turn around and use our tax dollars to bail out firms whose risky borrowing and lending practices are incomparably more destructive than our own. Those are usually the same politicians who voted to stiffen the penalties for individuals declaring bankruptcy, and who wouldn’t dream of supporting “socialist” programs like a national healthcare system, but who are all too ready to socialize the debts of private firms.

The Europeans I know ask: why aren’t Americans taking to the streets to protest this outrageous inequity? In answer, I can only refer them to one of their own best thinkers, the late German social scientist Max Weber. Almost a century ago, Weber had a revelation of sorts about the connection between the near-simultaneous rise of Protestantism and capitalism in 16th century Europe. His theory, sketched out in “The Protestant Ethic and the Spirit of Capitalism,” suggested that among the unintended consequences of writings by Martin Luther and John Calvin were the spiritual legitimation of profit and the release of individuals from the moral obligation to share their wealth. In fact, believers in predestination came to see material prosperity as a signal from God that they were among the saved: after all, they reasoned, God would hardly allow the elect to suffer privation during their time on earth if they were destined to spend eternity in the many mansions of the Father.

Thus, economic inequality was interpreted as a sign of divine judgment: both riches and poverty were deserved. This laid a semblance of fairness over conditions that otherwise might seem patently and intolerably unjust. And it dampened Americans’ impulse to revolt against the unequal distribution of wealth: the majority-Protestant American colonies might take up arms over taxation without representation, but it took a majority-Catholic country like France to rebel in the name of an impoverished, starving peasantry, giving “Equality” and “Brotherhood” as much weight as “Liberty.”

While these beliefs may seem anachronistic, they are deeply embedded in American life, particularly in the way we think about fairness and the distribution of wealth. The Puritan colonists were fervent Calvinists, and the institutions they and their descendants established became the basis for our nation’s financial and legal systems. They also created the templates for today’s “culture wars,” which aren’t just about abortion or gay marriage, but about who deserves to be “saved” economically.

The conflict we’re seeing now is just the most recent engagement in a long national struggle. During the Gilded Age of the late 19th century, notions of Social Darwinism became popular by updating the Puritan perspective with a pseudo-scientific twist: arguing that Nature, rather than God, created the rich and the poor through a process of “natural selection.” That is, wealth was a reward for superior genetic fitness, while the biologically “unfit” were condemned to poverty. But while this theory shifted the source of socio-economic division from God to Nature, and redefined the defect as biological rather than spiritual, the result was the same: the poor were still “undeserving” of any help. It’s interesting to note that the “War on Poverty” 60 years later was led by the nation’s first Catholic President, John F. Kennedy.

This history, in turn, suggests a legitimate policy reason for Americans who support the separation of church and state to care about the religious beliefs of candidates for the nation’s highest offices: their faith will shape how they perceive the distribution of wealth, including the provision of government aid to businesses and individuals in financial distress. With the economic End Times upon us, and the election just six week away, we’re awaiting a new answer to an old question: Who among us will be saved this time, and who left behind?

I snapped this photo of plaque over the front door of a house in Seville, Spain, because it records a Hobbesian state of socio-economic affairs: a world without public goods.

Used to be that there was no such thing as a public fire department. If your house was ablaze and you wanted help, you’d better have one of these plaques over your door, or you were SOL. If you wanted a fire brigade to come to your aid in such emergencies, you had to join a kind of club with private membership fees. It worked like this: you ponied up the fees, the club gave you a plaque to put over your front door, and then if fire swept through the neighborhood, the club dispatched help, but they *only* assisted paying members. So if you didn’t have that plaque over your door, the fire rescue teams would pass you right on by. It would not be uncommon to find that your house burned down while the one next door would be saved.

Sometimes, these clubs indulged in what laissez-faire economists might call “healthy competition.” This from Wikipedia’s entry on fire stations:

In many western countries, fire brigades were originally created by insurance companies to safeguard the property of their policyholders. Those who bought policies were given a plaque that would be mounted in a prominent position on the structure to denote its protected status. These plaques can still be seen on some historic buildings, particularly in the United Kingdom. Firemen summoned to burning buildings were expected to look for these plaques before fighting the fire. If the fire was in a building covered by a rival insurer, some brigades would deliberately obstruct that company’s fire brigade in an attempt to give rise to greater property damage (and subsequent expense to the insurer).

Some would call it savage and inhumane. Since the Reagan 80s, others have called it just desserts: if you don’t have the smarts or the money to insure yourself, then you must bear the consequences of not taking “personal responsibility.” And as we all know, privatization of public services has been such a rollicking success in domains such as:

Etcetera, etcetera, ad nauseum. Actually, privatization of public goods has repeatedly resulted in economic, social and ethical disaster (example: England’s 18th century Acts of Enclosure, or the privatization of France’s war debt by John Law), so why are we still talking about this?

That was a a rhetorical question. The answer is: because privatization makes some people incredibly rich.

Update: a shortened version of this post was published as an op-ed piece in the Philadelphia Inquirer on November 18th. See it here!

Remember the story of Dr. Frankenstein and his monster? In Mary Shelley’s original book, the doctor isn’t evil—just a brilliant scientist out to prove his talent through innovation. Quite unintentionally, by building something more complex that he can manage, Frankenstein creates the means of his own destruction, and destroys many other lives in the process. This may turn out to be the same narrative structure upon which our current financial crisis turns.

While there may indeed have been “greedy CEOs” and “reckless speculators” running amok on Wall Street, it is more plausible that those who created and benefited from recent financial innovations were just rational capitalists rather than evil geniuses bent on defrauding the public. That is, the people who brought us the Byzantine structures of the subprime market (credit default swaps, anyone?) were too busy pursuing their own self-interest and maximizing profits to realize that they were building a system that exceeded their understanding or control.

If, instead of imaginary monsters, you want to be scared of something real, try this: the biggest problem Americans face right now is that no one really understands what’s happening in the markets. The system is so complex, it overwhelms even the financial professionals and policy experts who are paid to understand it. And this suggests a very different strategy for addressing the global market crisis than those we’ve been offered: instead of using the same tools that created the mess in order to fix it, or declaring open season on CEOs and hedge fund managers, we should be applying complex systems analysis to the problem.

The science of complex systems has been around for decades, but has only recently been applied to questions about financial markets. Research centers like the Santa Fe Institute in New Mexico have pioneered the use of complex systems models to explain biological phenomena like aging and gene expression. These are instances of what the late mathematician and computing visionary Warren Weaver called “organized complexity:” they involve seemingly random events, but only because they are governed by rules and interconnections that elude current models and measurement tools. These phenomena are often misclassified as cases of “disorganized complexity” and analyzed—incorrectly and with misleading results—using tools designed for understanding random activity. Foremost among these tools are the statistical methods favored by physics and its imitators in the social sciences: economics and finance.

There is good reason to suspect that our financial experts and policy makers are not the right people to fix the current market mess. It might seem as though those who created the problems would have the most insight on what went wrong; but instead, it’s likely that the system crashed in part because of their inadequate grasp of the social forces underpinning markets. Finance is dominated by a misplaced faith in the “efficient markets hypothesis:” the theory that people don’t make prices, markets do; as a result, prices move randomly, much like particles move under the Second Law of Thermodynamics. Uncritical belief in randomness has created an impasse, such that academic research either consigns great swathes of financial behavior to the dustbin of “irrationality,” or concedes the inadequacy of their models by adopting the behavioral assumptions of sociology and psychology. In practice, the randomness-based theories embraced by finance scholars and professionals have produced debacles like Long Term Capital Management, brought to us in part by two Nobel Prize winners in economics. If that caliber of expert could do so much damage working with inappropriate models and analytical tools, why should we expect any better from their less-illustrious colleagues?

If we really want to get our financial system up and running again, we’re going to have to wade into issues that have nothing to do with random movements of particles or prices, and everything to do with the kind of “messy” social behavior excluded from analysis in economics and finance. Issues such as trust, which we need to understand in order to solve the problem of banks who won’t lend to one another. Or the challenge of pricing—something that, as we saw in last week’s sell-off and this week’s record-setting recovery, is neither random nor in any sense governed by an invisible hand. These are very practical, brass-tacks issues for which economists, finance professionals and policy-makers have dubious models, at best.

You probably know the saying, “if all you have is a hammer, everything looks like a nail.” To solve a complex problem like the market crisis, we need people with a wide array of tools at their disposal. If the US government thinks it worthwhile to employ a Chief Economist, why not someone who understands the human factors that move markets—a Chief Sociologist, or a Chief Psychologist? Historically, the argument has been that economics is a “practical,” applied social science with outstanding predictive powers, while sociology and psychology are too focused on exploration and explanation. But this view is long out of date: economics has changed dramatically since the computing revolution of the mid-20th century, becoming so theory-oriented that data from the real world is largely irrelevant.

Sociologists and psychologists, however, are almost entirely data-driven. We tackle messy practical problems head-on, without excluding the factors which make social systems complex: emotions like fear, greed or confidence that drive so much of economic behavior; trust in institutions like banks and courts of law; and the fragile, unspoken agreements we make allowing us to exchange pieces of paper for essentials like food and housing. This is the kind of expert needed to address the breakdown of a system grown too complex for its own creators.

…”Housing is a right.”

On a wall in Genoa, Italy, August 2006.

Socialist Snail is still making its way across the Atlantic to protest foreclosures in the US. Look for him sometime in 2010.