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Too Simple To Be True January 25, 2008

Posted by Jim Satterfield in Business & Society, Corruption, Economics.

David Brooks writes of the recent problems in the financial sector of which the subprime mortgage mess is only one part. His column says that there are two narratives and only two narratives used to explain it. The Greed Narrative or the Ecology Narrative. He closes with this (emphasis mine).

The lesson of the Ecology Narrative is that, in most cases, the market corrects itself. Maybe this year banks will change their pay structure so there’s not so much emphasis on short-term results. Maybe companies will change their boards to improve scrutiny over complex new instruments. In short, markets adapt.

People who embrace the Ecology Narrative don’t like the offensive bonuses that get handed out on Wall Street. They just don’t see any way the government can curtail them without rending the fabric of the ecosystem. They don’t like the periodic crises, but don’t see how government can prevent them without clamping down on innovation. The challenge is to give people the means to withstand the perturbations.

The Ecology Narrative is not morally satisfying. I wouldn’t bet on its popularity as a backlash against Wall Street and finance sweeps across a recession-haunted country. But the Ecology Narrative has one thing going for it. It happens to be true.

I just haven’t seen any signs that there is anything in the financial services sector that would correct the problems with the compensation structure. I haven’t read anything anywhere that indicates I’ve missed something that would indicate there’s any demand building for a system less destructive of the long term good. After all, the people who make a mint with the current structure are the ones in charge and there is no motivation for them to change things and the incestuous relationship between company management and boards pretty much guarantees there is no force influencing them from the “outside” to encourage repairs. There is no magic wand, spell or potion that guarantees that “markets adapt”. Not so long as over-compensated executives and traders have people like Brooks shrugging and saying that they and the damage they do to our economy must be tolerated because of unproven claims about the good they do.

But his claim is too simple. His last sentence precludes the possibility that while the Ecology Narrative has a lot going for it, it just doesn’t explain a lot of what is seen in the real world. Frankly, Mr. Brooks, someone got a lot of their Greed Narrative in your Ecology Narrative. And the narrative that includes them both is the one that is true.



1. sisuntas - February 26, 2008

Brooks’s ‘market ecology’ principle is but the latest example of the dangers of swearing allegience to an ideology to such an extent that when bad results rear up , the only reaction is to defend it, apologize for it, propose hopeful scenarios for a resolution sometime in the future, anything but examine the real life consequences and entertain possible solutions contradictory to the core ideoloby.

People are people, whether they are actors in the marketplace or in politics or any other arena. If social systems don’t self-correct why on earth would one expect markets to do so?

When we tackle social systems, the notion of justice is introduced, and justice is achieved(however imperfectly) with laws. There is no natural incentive for those with power to share power or to relinzuish it.

To imagine that the markets are any different is to claim that people change their basic character when they act in the market place. Considering that the markets are driven by naked greed, such a claim is beyond pollyannish, it’s bizarre. I don’t see any reason to suppose that those who stuffed their pockets with the profits from disasterous practices will now reconsider. The most natural. in character, reaction is far more likely to be that they just move on to finding other means to make the quick profit.

In markets, as in social systems, it’s a false dichotomy to frame the issue in terms of innovation stifling regulation vs no regualtion. As in all things, what is needed is a balance betwen opposing poles: enough regulation to check the worst practices, but not so much that innovation is stifled. To wait for markets to self-correct is the equivalent of just waiting for the social order in the world to self-correct with no intervention, and that hasn’t worked well, ever.

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