The Pursuit of Wealth and Its Consequences 24 comments
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An unusually quiet Sunday morning – the kids are with their grandparents, leaving me with a chance to think of something beyond the immediate economic data. This morning that meant a stream of thoughts triggered by Paul Krugman’s most recent op-ed, particularly this:
Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
In this paragraph, Krugman sounds less like an economist and more like a philosopher. But I am not complaining in the least; economists lost a sense of the essential humanity of their topic when they gravitated down a path of sanitized mathematical and statistical methodology. Indeed, I often think that economists share no small blame for our current economic challenges, as the profession provided the intellectual basis for free markets but often failed to place that ideology in a larger social perspective.
It is as if the profession followed the path of The Wealth of Nations but forgot The Theory of Moral Sentiments. The latter is Adam Smith’s philosophical tome, and if you can only read one of these two, it is my recommendation. I suspect that Krugman had TMS in mind when he wrote the above paragraphs. An excerpt from Smith:
In equal degrees of merit there is scarce any man who does not respect more the rich and the great, than the poor and the humble. With most men the presumption and vanity of the former are much more admired, than the real and solid merit of the latter. It is scarce agreeable to good morals, or even to good language, perhaps, to say, that mere wealth and greatness, abstracted from merit and virtue, deserve our respect. We must acknowledge, however, that they almost constantly obtain it; and that they may, therefore, be considered as, in some respects, the natural objects of it. Those exalted stations may, no doubt, be completely degraded by vice and folly. But the vice and folly must be very great, before they can operate this complete degradation. The profligacy of a man of fashion is looked upon with much less contempt and aversion, than that of a man of meaner condition. In the latter, a single transgression of the rules of temperance and propriety, is commonly more resented, than the constant and avowed contempt of them ever is in the former.
According to Smith, it is human nature to admire the rich, even when we shouldn’t, a mistake that Krugman argues led us to where we are today. Smith offers much more detail; an online version can be found here. For those with a busy schedule, a good place to start is Robert Heilbroner’s The Essential Adam Smith; it is one of the books I assign when I teach history of economic thought.
Krugman also laments the lost opportunities attributable to the pursuit of wealth:
Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Which makes me think of another in the canon of Western culture, the 1987 movie Wall Street. A memorable line from the final scene:
Carl Fox: Stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.
For an interesting recent take on the draw of Wall Street and easy money and how it has warped career choices, see Michael Lewis in Bloomberg:
What Wall Street did so well, for so long, was to give people jobs that they could pass off to themselves as well as others as callings. Such was their exalted social and financial status: Wall Street jobs made people feel special without actually having to be special. You never really had to explain why you were doing it -- even if you should have.
Readers’ responses to Lewis can be found here. One particularly troubling comment:
I know why I am in finance -- partly because I enjoy the action and the excitement of life on the trading desk and also because I know what I want.
I want private school for my kids, I want my kids to go to a better university than Michigan, I want the Porsche S-1 one day, I want the apartment in the city and the summer home and yes, I want to marry a beautiful woman who shares certain values.
None of the above happens if you are a broke high school math teacher or a mediocre screenwriter.
From Smith:
The poor man's son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich. He finds the cottage of his father too small for his accommodation, and fancies he should be lodged more at his ease in a palace. He is displeased with being obliged to walk a-foot, or to endure the fatigue of riding on horseback. He sees his superiors carried about in machines, and imagines that in one of these he could travel with less inconveniency. He feels himself naturally indolent, and willing to serve himself with his own hands as little as possible; and judges, that a numerous retinue of servants would save him from a great deal of trouble. He thinks if he had attained all these, he would sit still contentedly, and be quiet, enjoying himself in the thought of the happiness and tranquillity of his situation. He is enchanted with the distant idea of this felicity. It appears in his fancy like the life of some superior rank of beings, and, in order to arrive at it, he devotes himself for ever to the pursuit of wealth and greatness. To obtain the conveniences which these afford, he submits in the first year, nay in the first month of his application, to more fatigue of body and more uneasiness of mind than he could have suffered through the whole of his life from the want of them. He studies to distinguish himself in some laborious profession. With the most unrelenting industry he labours night and day to acquire talents superior to all his competitors. He endeavours next to bring those talents into public view, and with equal assiduity solicits every opportunity of employment. For this purpose he makes his court to all mankind; he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it. It is then, in the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends, that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquillity of mind than the tweezer-cases of the lover of toys; and like them too, more troublesome to the person who carries them about with him than all the advantages they can afford him are commodious. … But in the languor of disease and the weariness of old age, the pleasures of the vain and empty distinctions of greatness disappear. To one, in this situation, they are no longer capable of recommending those toilsome pursuits in which they had formerly engaged him. In his heart he curses ambition, and vainly regrets the ease and the indolence of youth, pleasures which are fled forever, and which he has foolishly sacrificed for what, when he has got it, can afford him no real satisfaction. In this miserable aspect does greatness appear to every man when reduced either by spleen or disease to observe with attention his own situation, and to consider what it is that is really wanting to his happiness. Power and riches appear then to be, what they are, enormous and operose machines contrived to produce a few trifling conveniencies to the body, consisting of springs the most nice and delicate, which must be kept in order with the most anxious attention, and which in spite of all our care are ready every moment to burst into pieces, and to crush in their ruins their unfortunate possessor. They are immense fabrics, which it requires the labour of a life to raise, which threaten every moment to overwhelm the person that dwells in them, and which while they stand, though they may save him from some smaller inconveniencies, can protect him from none of the severer inclemencies of the season. They keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death.
Smith, in my opinion, places too much weight on the sufferings of the rich (or the ease of tranquility of the poor – he appears to be justifying the extent of inequality existing in a market system). Still, his underlying point regarding the ultimate rewards of the pursuit of wealth may be less than imagined. And, as Krugman suggests, that pursuit can yield enormous costs not just for the individual, but for society as a whole.
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This article has 24 comments:
"For the love of money is a root of all kinds of evil. Some people, in their eagerness to get rich, have wandered away from the faith and caused themselves a lot of pain." I Timothy 6:10
mast-economy.blogspot....
And so you see -as in this article- philosophical discussions which are exssentially moral positions taken by the respective authors. Talk of purely metaphysical terms like "greed" "wealth" "moral hazard" is at its foundation a discussion of right and wrong.
In fact, isn't this massive bailout which keeps expanding to every segment of society, a de facto biblical Jubilee? Except there isn't so much forgiveness as their is transfer of indebtedness to the taxpayer.
And so as our esteemed authors layout their case for what caused it, what it is, how to prevent it and where we should be, they must establish some moral baseline. You know, the straight stick laid up against the crooked one ...so you can tell it is crooked.
My, friend as I finished the article, the words you quoted from scripture were on my tongue; and they appeared in your comment.
On Dec 22 08:44 AM Good News Economist wrote:
> Interesting quote from about 2000 years ago
>
> "For the love of money is a root of all kinds of evil. Some people,
> in their eagerness to get rich, have wandered away from the faith
> and caused themselves a lot of pain." I Timothy 6:10
>
> mast-economy.blogspot....
Right on!
1) Darwinsim works, intelligence levels are facts, but:
2) Philanthropists encourage education and directly support it
3) Looters with the higher intelligence level must do hard time
4) Mankind has a broken genetic code creating chemical deficiencies and other ailments that create abuse. We shall repeat history until we create genetic engineering that works for all mankind. The bad news is that this won't happen in our lifetimes.
Why then, does our greed have no feedback mechanism - no thermostat that says "enough" and shuts it off? Why are we like goldfish, who will eat until they die if allowed to overfeed.
Perhaps greed has an evolutionary purpose. Perhaps enough truly is never enough right before a famine, natural disaster, economic collapse, or war. Perhaps those with greed and ambition miserably survive and reproduce more effectively than those who said "enough" at some point, only to find themselves in the breadlines or drafted into war in less prosperous times.
trade was at the bottom of our decline. the financial incentive to invest in other countries should have come with a moderation back in the early 70's
we are going to have 40 million unemployed and 100 million people in poverty now. Our wealth is now in the hands of a foriegn power. who to blame?
I feel better being lowly in spirit and among the oppressed than to share plunder with the proud.
-- Ralph Waldo Emerson
I believe we honor the celebrity for a similar reason-- we feel that they have beaten the system. We feel that they don't have to put up with the slings and arrows of outrageous fortune, "the pangs of despised love, the law's delay, the insolence of office" and so on.
That's what we actually value.
Smith wasn't downgrading the pursuit of wealth at all. He was simply putting the individual motivations that drives a few people to get up in the morning. This puts his moral tale in context:
"And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants." (Moral Sentiments, Book IV, chapter 1, paragraph 10: page 183)
Isolated quotations from Adam Smith often smother his great subtlety of expression by missing his counter-points.
The people in their 60's and 70's who lost their retirement savings in the stock market are unfortunate examples of how performance chasing can lead to financial self destruction.
Calling these Banksters and their hucksters professionals is absurd.
Leaving aside the origin of this saying is the New Testament [Mark 8:36 and (with slight alteration) Matthew 16:26], isn't this the question both Smith and the author ask? It's not that the pursuit of wealth is itself immoral, but that the pursuit of anything with sufficient singlemindedness to blind and deafen oneself to questions of morality is a sure road to ruin. Neither the math teacher nor hedge fund manager can legitimately ignore the demands, direct and indirect, of the voices of those to whom they are responsibile.
You can have your choice here, either Luke 12:48: "From everyone who has been given much, much will be demanded;and from the one who has been entrusted with much, much more will be asked."
Or JFK: "For those to whom much is given, much is required."
Those Wall Street fortunes beget obligations. All around us today we are beset with the consequences of so many having forgotten that simple truth.
Tim Duy's comments beg the question: when are we going to learn that leaving economic controls in the hands of few rich and powerful only leads to wealthier and more powerful rich and powerful?
Great American Yankee Doodle Dandy families and their Cannon Fodder conscript children are immersed in the jingoism and rhetoric of the 4th of July while the captains and generals of US enterprise steal, defraud and walk-away from accountability on a super-nova scale.
If Obama focuses on that "commey" technique of economic planning and eschews the noise on the center-right the world may have a chance to rebuild a sustainable economy based on green technologies, better roads, bridges, civic infrastructure and jobs for those less inclined to be hired as brokers, traders and professors with black-box trading techniques for the next LTCM.
Only 'too much' is enough.
Michael, if you are out there, the people on Wall Street ARE special! They have assessed the situation, taken the right courses, and moved into the right profession.. I know, because I have taught 'money and finance' to very many people just like those quants, in many countries, and believe me it was a pleasure. I got the same thrill when I was studying engineering in Chicago or taking infantry basic training in Fort Jackson and Fort Ord..
Then what went wrong? What went wrong was that Investors, consumers, quants (i.e. rocket scientists) and their political masters wanted to make the impossible possible. It happens all the time, and it will continue to happen. Better get used to it, because if you are interested in energy, you might see much worse in the next few years.
By the way, this is a marvelous article, and I hope that I remember to keep it.
Ferdinand E. Banks
Jack Nicholson, playing the President in Mars Invades .
I fear the path we are taking to "fix" the problem will end up greatly magnifying it. At some point we must swallow the medicine instead of looking for the easy fix.
Best Wishes,
D4L
Perhaps greed is good, and the pursuit of wealth ultimately does bring contentment and well-being, but ONLY if done in an honest fashion, with no trickery or deceit, especially of oneself.
Gordon Gecko indeed was in many was admired by all for his wealth, except for Budd Fox and that English knight (I can't recall his name). They despised him precisely because they found in Gecko's character the emptiness of the lies and illusions of power he surrounded himself with.
To bring this viewpoint to the present world, what is it that truly bothers Main Street? It is not the wealth and prosperity of (what was formerly) Wall Street that unsettles them, but the manner in which it was bestowed - outlandish executive pay, 50:1 leveraged assets borrowed from banks that charged next to nothing in a rigged scheme, and outright corruption in the likes of options backdating, preferential selling terms for mutual funds, and just plain deceit in Ebbers and Madoff. But that's not all.
What probably bothers the typical American more than anything else, more than the headlines of the latest corporate scandal, is that they fooled themselves into thinking they were rich. Not just rich, but fabulously rich, more prosperous than all of their neighbors, whether they lived on Elk Road or the Silk Road. They deceived themselves into thinking that they were entitled to this right to wealth, that the laws of business no longer applied to them, that "this time, it's different". Consumerism reigned at the expense of productivity. We literally ate ourselves until there was nothing left. Or, whatever you call our current state of affairs, perhaps a little more than nothing.
Can we save ourselves? I think so - a nice, healthy dose of honesty all around would go very far to cure us from this cold, IMHO. At least you'd know what your home was really worth.