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Morality and the GFC

By Ian Harper - posted Friday, 9 October 2009


It’s a fascinating time to be an economist. After all, it’s not every day that you live through a near meltdown of the global financial system. But here’s a secret: most economists hang out for events like these because you learn something new and interesting - which is not to downplay or ignore the real hardship these things visit on people’s lives.

I suppose it’s analogous to the medical practitioner who hangs out for a particularly rare disease. I mean it’s a tragedy for the patient but an extraordinary opportunity for the medical profession. Economists are a bit like that. Economics is like the medical profession in another respect too: economics has a very primitive understanding of the world at this point in its development. Economists have achieved the level of practical sophistication displayed by medical practitioners in the days when their standard prescription, no matter what the aliment, was to let blood.

It’s also a fascinating time to be an economist with an interest in moral questions - by which I mean questions that have to do with principles of right conduct. People are reacting to the Global Financial Crisis with much more than dismay at the way things have turned out but with a real sense of moral outrage. Words like “greed” and “selfishness” are being used, and some of the behaviour leading up to and during the crisis has been roundly condemned as very bad indeed.

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For an economist interested in moral questions, this reaction calls up the relationship between the technical discipline of economics and its foundations in moral philosophy. The founder of modern economics, Adam Smith, was a professor of moral philosophy at the University of Glasgow. He is best known among economists for his book, An Inquiry into the Nature and Causes of the Wealth of Nations.

But Smith is equally well known among moral philosophers for an earlier work, The Theory of Moral Sentiments. Smith scholars will remind you that it is quite inappropriate to read The Wealth of Nations without having understood what Smith was saying in The Theory of Moral Sentiments. It’s very easy to accuse Smith of promoting a heedless “laissez faire” economics. But he was scathing of where the market could drift if it ever slipped its moral moorings.

The Global Financial Crisis is the worst financial crisis we’ve experienced since the Great Depression. The IMF tells us that something like US$4 trillion worth of wealth has been destroyed worldwide as a result of the GFC. To put this into perspective, US$4 trillion is between one quarter and one third of the annual output of the US economy. Many people fear that the “second shoe” is yet to drop. The US banking system is still “coughing up” bad loans and the banking system in Eastern Europe could well fall into technical bankruptcy. It’s no comfort to know that much of the Eastern European banking system is owned by the Western European banking system.

At one level the GFC is just another in a long line of “bubble” events. Those who enjoyed Niall Ferguson’s book, The Ascent of Money, or watched the recent television series will know this. These sorts of events come along more or less once in a generation. They’re not always as big as the GFC, but there are certainly historical precedents for crises that are as big as this one. Financial systems from time to time suffer crises of confidence - crises of faith. People suddenly don’t believe in financial institutions anymore.

The GFC has shaken people’s faith in the trustworthiness of financial institutions and especially financial advisors. You don’t need to be a specialist in finance to understand that if you undermine people’s trust in the financial system, you’re in deep trouble. The life-blood of the financial system is trust. It’s all about making promises into an uncertain future and, if you can’t trust the institutions or the advisors, the whole system seizes up. People’s faith was shaken when they saw finance professionals nakedly serving themselves at the expense of their customers. They felt that’d been tricked, or worse, lied to.

That’s why the GFC is more than a credit crisis. It’s also a crisis of faith. The near meltdown has shaken people’s faith in the financial system and its institutions. It’s even shaken people’s faith in the way we live. The Prime Minister of Australia, Kevin Rudd, has written not one but three essays in which he essentially says that the system which gave us the GFC is “fundamentally flawed”. Whether you agree with the Prime Minister or not, this is evidence of the depth to which faith in the system and its institutions has been shaken - even very senior politicians feel compelled to write about it.

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Recently Stephen Green, who is global chairman of the Hong Kong and Shanghai Banking Corporation, published a book called, Good Value, in which he explores the moral dimensions of the GFC. He points out that there are many great works of literature, both ancient and modern, that expose the morally corrupting influence of money and wealth. Like me, Green is a Christian and makes special mention of biblical teaching in this context.

The Bible points to the need for our lives to serve a higher purpose than self-gratification through money, power, or fame. It does so because self-gratification is ultimately futile - in fact, it’s no gratification at all. In fact, modern secular psychology also points out that self-gratification can be a prime cause of anxiety and depression. In his book, The Loss of Happiness in Market Democracies, by no means a religious or moral tract, Robert Lane concludes that if your life is driven only by extrinsic motivations - extrinsic goals, rather than intrinsic goals - not only will you feel dissatisfied and empty, you’ll actually make yourself sick.

What’s interesting about all of this, and Stephen Green makes the same point, is that we find it relatively easy to recognise these failings in other people. That’s why people are reacting to the GFC in the way they are. Even people who might consider themselves moral relativists, and who struggle with the idea of absolute right and wrong, can’t seem to stop themselves feeling that there is something deeply wrong about what’s happened. Whatever people think about moral questions, it seems to be true that people lose faith in those they think are just looking after themselves. When you discover that some person or institution you trusted turns out not to have your interests at heart but instead is using you, it’s a shattering experience.

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This article is an edited extract from the Smith Lecture 2009, The GFC: A Crisis of Credit and Faith? on September 2, 2009.  



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About the Author

Professor Ian Harper is a partner with Deloitte Access Economics Pty Ltd. His expertise is in banking, insurance and superannuation, payments services, financial market regulation, health services, including pharmaceutical wholesaling, and health policy. Professor Harper is a Fellow of the Australian Institute of Company Directors and Emeritus Professor of The University of Melbourne.

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