Greed as an Explanation of Crisis

Published on political affairs pa, by Prabhat Patnaik, June 4, 2009 (Original source: People’s Democracy, India).

There is a very common view that the current financial crisis of the capitalist world, and its fall-out in the form of the most severe slump since the Great Depression of the 1930s, are a consequence of “greed” on the part of the financial sector. This view has even entered the thinking of many progressive intellectuals. To talk of greed as underlying the crisis is certainly not incorrect, but it is not enough. “Greed,” or grabbing the maximum for oneself in any given situation, is not some exceptional trait that financiers in the last few years suddenly displayed. It is central to capitalism; the system functions precisely through the greed of the capitalists. In fact Adam Smith the founder of classical economics drew attention to the paradox that the system as a whole functioned benevolently (so he thought) even though functionaries of the system, the capitalists, were motivated exclusively by their own self-interest (a euphemism for “greed”). His predecessor, Mandeville in his Fable of the Bees, had gone even further, underscoring how “private vice” produced “public virtue” …  

… Boom-bust Cycle and “Greed”

Some may feel that while the crisis itself has to be located in the modus operandi of the system itself, its severity this time is caused partly by the fact that the development of the enormous “derivatives” market made investment banks feel less exposed to risk. They sold off their risky assets, experienced an “I-am-all-right-Jack” syndrome, and went in for the acquisition of more risky assets which were again sold off, and so on. While they felt less risk, the risk to the system as a whole kept cumulatively increasing. Or, looking at it from the point of view of the system as a whole, there was a systematic understatement of risk because of the development of “derivatives,” so that when the crash came it was all the more severe. And since such behavior which amounts to duping the system for maximizing one’s own gain, goes beyond the normal modus operandi of the system (where the question of duping does not necessarily arise), it can surely be characterized as “greed.”

Even this however would not be scientifically correct for at least three reasons. First, hedonistic maximization which is the essence of capitalist “rationality” does not concern itself with whether the system is being duped. It does not stop short of duping the system. If as a capitalist I can make more money by duping the system, then it is rational on my part to do so. Hence there is no special “greed” involved in duping the system. Duping the system, if it is possible to do so for gain, is part of “rational behavior.” Second, it is not even the case that the Wall Street investment banks that were selling off their loans in the “derivatives” market were consciously duping the system. It was more a case of the anarchy of the financial market making everybody unaware of the risks that were piling up rather than any particular group consciously duping some other group. Since all of them would get blown up if the financial system collapsed under the risks being piled up, the fact that the investment bankers behaved as they did was more a reflection of the anarchy of the system than of any special “greed” on their part over above what is commonplace under capitalism. Third, investment banks’ behavior, no matter how we choose to characterize it, was as much responsible for the prolonged boom as it was for the slump.

It is a feature of “bubbles-led growth” that the more the boom is prolonged, the greater is the severity of the crash. The underestimation of risk owing to the introduction of “derivatives” was responsible for the strength of the boom: asset prices kept rising and rising (which they would not have done to the same extent if risk had been accurately assessed), because of which the real economy too benefited in terms of output and employment growth. Precisely because of this very fact however, when the crash came, it was all the more severe.

Thus whichever way we look at it, the “greed explanation” simply will not do. If “greed” is defined as not being co-terminus with capitalist “rationality,” then it is simply wrong to attribute the crisis to “greed”, since that implies that the crisis has nothing to do with the nature of capitalism per se. If “greed” is taken to be co-terminus with capitalists’ “rationality,” then there is no point talking about “greed” per se. Whichever way we look at it, the “greed” explanation lacks justification, which is but another way of saying that a scientific analysis of capitalism in crisis must be substituted for sheer moral indignation. (full long text).

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