Arnold Kling  

Moral Failure?

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The Spring Issue of the Harvard Journal of Law and Public Policy is now on line, with a focus on the economic crisis. You will find many familiar names among the authors. This is also the place where I have my essay arguing that the financial crisis was primarily a cognitive failure. Taking the opposite point of view is Kevin T. Jackson, who writes,


adopt the perspective of a moral‐cultural mental model (MCMM) as well. Indeed, such a vantage point is essential for discerning the lessons for enlightened business leadership going forward. From an MCMM point of view, several causes of the present economic crisis, particularly financial innovation and complexity, excessive executive compensation, and neglect of moral hazard, are seen to be rooted in deep‐seated moral‐cultural tendencies. Most notable among these are technocratic and dehumanized economic thinking, egoistic individualism, greed, short‐termism, rejection of objective moral values, and a highly speculative culture.

He goes on to offer perspective from Aristotle and Kant, among others. I keep thinking of the typical mortgage broker, who I picture as a high school graduate trying to squeeze out a narrow profit in a cutthroat industry, and wearing a tasteless amount of that profit on his wrist or around his neck. I think that unless Kant and Aristotle are providing customer referrals, he would not care a whole lot about they have to offer. The investors who buy loans from mortgage brokers are not in an ethical bind, but they need to realize who they are dealing with. They need to understand the concept of quality control, which might have to include some of that time-consuming paperwork that provides third-party verification of income, assets and employment. Most of all, you need a regulatory environment that does not promote lending with low down payments.

Anyway, browse through the table of contents for the issue. I particularly liked the articles by Richard Epstein and Hadley Arkes. Darrell Issa, a Republican Congressman, has an intelligent piece, which I cynically assume was ghost-written by a staffer. Ron Paul also has a piece, which has a lower probability of being ghost written. Regardless of who wrote the articles, I do credit both Congressmen with understanding the substance of what appears under their bylines.


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COMMENTS (14 to date)
fundamentalist writes:

The problem with MCMM is that greed (and moral failure in general) is a constant, like gravity. Blaming economic crashed on MCMM is like blaming airplane crashes on gravity.

Foobarista writes:

I agree with Fundie. Greed is a constant - what makes it a "problem" is when you set up incentives and regulatory arrangements so that greed takes things in a bad direction.

If you set things up so that there's easy money to be made, someone will make it, whether or not it is "moral" to do so.

Kevin Driscoll writes:

It seems that Jackson is relying on more specific ideas than "Greed" in general. Greed is very hard to define in a market. How much does one need to desire profits before he or she becomes "greedy"?

Setting aside the problem of definition, even if greed is a constant in general, other more measurable quantities like executive compensation are more relevant here. At least we can compare current executive salaries to their historical levels and investigate how business or stock performance correlates with compensation.

Although I take what Kant says very seriously, I'm not entirely sure he provides an explanation for the current financial crisis. We have to remember that Kant never claimed that following his dictates leads to a productive or happy society. In fact, it seems more likely that Kant viewed a miserable person as one of the most virtuous. Kantians don't make very good CEOs.

agnostic writes:

Greed is not a constant, nor is any other human tendency. Trust is not, for example; social surveys show that it varies widely across the world, and even in a country over time. Same with overall happiness.

It may be harder to measure, but you can also see this with pride and vanity, intellectual hubris, etc.

Obviously greed is always "present," but the degree matters.

fundamentalist writes:

I used greed as a catch all to refer to all of the other MCMM's. Greed isn't the only problem but it's the one people dredge up the most as a cause of crises.

social surveys show that it varies widely across the world, and even in a country over time.

I seriously doubt that. That would mean that human nature changes across cultures and time, which doesn't happen. They may be measuring something else and calling it greed, but greed is part of human nature. As Foobarista wrote incentives and regulatory arrangements can encourage and discourage the display of greed, but not eliminate it. When the Feds reduce interest rates below the market rate, then it motivates greedy behavior.

wlu2009 writes:

Fundie, I think it depends on what one means by greed. If greed means the pusuit of self-interest, then yes that is a constant. But what may vary over time and cultues is the degree to which self-interest interplays with ethics and etiquette. Jackson may be arguing that in other day and age the high school grad mortgage broker would not have sold a family a mortage he knew they couldn't afford because it was unethical. Arnold, on the other hand argues that the ethics wouldn't have mattered if the ultimate purchasers of the MBS did a little dilligence. I'm inclined to side with Arnold on this one and say this is a cognitive failure, not a moral one.

agnostic writes:

"I seriously doubt that. That would mean that human nature changes across cultures and time, which doesn't happen."

Fortunately your abstract doubt does not matter: the empirical data show that it's wrong. Look up the TRUST variable in the GSS and plot it over time. Same with HAPPY. To see that trust, etc., vary across cultures, look it up in the World Values Survey. Both datasets are online and easy to use.

If you don't know how to do that, then it's time to get your hands dirty and learn how to investigate the real world rather than blabber from the throne in your tiny cave.

Arthur_500 writes:

I strongly reject the moral failure argument as everyone is guilty of moral failure. Chairman Mao lived comfortably while millions suffered - that is moral failure. Secretary of State Clinton claims evil forces who utilize their political contacts get rich while others remain in poverty while hubby gets $100 million for giving speeches. He was never politically connected so that isn't a moral failure.

In addition, everyone drank from the kool-aid and "knew" that by spreading risk there was less chance of failure. We still know it because the Treasury is utilizing the same tools that got us into this mess to get us out.

Of course the government is moral and individuals in business are immoral. That will sell books.

Steve Sailer writes:

Dear Arnold:

Excellent article you wrote.

Still, how are we ever going to get beyond "cognitive failure" if we have to continue to dance around the single biggest blindspot: indoctrination in the dogma of diversity. Greed ye shall always have with you, but it was the combination of greed and the cover story of fighting racist redlining (as used by George W. Bush, Angelo Mozilo, and on and on) that made the mortgage meltdown what it was.

For example, you cite Richard Syron of Freddie Mac as your first case study of cognitive failure.

But why was Syron chosen to be CEO of Freddie Mac and get paid $38 million, anyway? Well, one reason was that he was a hero to the Great and the Good in the early 1990s for unmasking a terrible societal scourge: lending discrimination.

The Boston Globe’s Gavin credulously recounts:

"Syron encouraged the Boston Fed's research department to wade into important, but contentious public policy issues. Perhaps best known was its study of lending discrimination, [Mortgage lending in Boston: Interpreting HMDA data] which found race, not lending risks, driving loan decisions."

This study was hugely popular and influential with all the right people:

"Joseph P. Kennedy II, then a Massachusetts congressman, said the study helped change lending practices and expand credit to minority and poor neighborhoods."

Unfortunately, it was based on economic illiteracy. As Gary Becker's Ph.D. thesis (based on a suggestion by his adviser, Milton Friedman) pointed out, if firms were irrationally discriminating against minorities, it would be profitable for nondiscriminators to enter the market and cash in.

In reality, as Peter Brimelow and Leslie Spencer wrote in Forbes on January 4, 1993, whites and minorities had the same default rate back then—demonstrating that

"[t]he market, in short, worked. The mortgage lenders somehow weeded out the extra credit risks among minorities, down to the, point where white and minority defaults were at an equal, apparently acceptable, rate."

Today, of course, minorities have higher default rates than whites—due in large part to the quotas whose justification traces back to the stupid study Syron sponsored.

Troy Camplin writes:

"technocratic and dehumanized economic thinking, egoistic individualism, greed, short‐termism, rejection of objective moral values, and a highly speculative culture"

I don't disagree that some of these are in fact in play. For example:

"technocratic thinking" -- another term for "traditional socialist thinking," which derives from the 19th century deterministic/entropic view of the world. If you have this world view, you are bound to make gross errors in a world that is in fact a set of self-organizing complex adaptive evolving systems.

"dehumanized economic thinking" -- this is what you get from neoclassical economics, which is similarly rooted in the above noted world view.

"Greed" -- as already observed, there is no getting rid of greed. It is a human universal, meaning there is a tendency for people to be greedy, even if particular individuals at particular times and in particular places are more or less greedy than others. This does not affect whether or not it is a universal. What we then need is a system that transforms greed into a social benefit rather than a social danger. That depends on having the proper incentives, instutitions, etc. The free market best transforms greed into a social good. What anti-market regulations have been put in place to make greed a problem, then?

"short-termism" -- this also goes to incentives. What regulations have been put in place to encourage short-termism? (Hint: Keynes was a short-termist.)

"rejection of objective moral values" -- doubtful. While I have no doubt there are objective moral values, I do doubt that the majority of people get too far away from those values. Most people don't kill, steal, rape, or even simply physically attack someone. Those are moral cultural universals -- even if there is variations on them among cultures. None of these objective moral values had anything to do with the economic collapse. Beyond this, he needs to be clearer what he means by this term.

"highly speculative culture" -- artificially low interest rates cause people to be "highly speculative," so we're back to the government, again.

Dain writes:

Critical Review's Jeffrey Friedman noted that the mortgage backed securities rated A and AA were most attractive to the greedy, and yet were usually not purchased. If greed were primarily at play in this crisis that would not be the case:

http://causesofthecrisis.blogspot.com/2010/02/too-big-to-fail-evidence.html

fundamentalist writes:

Agnostic, I do not doubt that the GSS has measure it calls "trust" and "greed". But those are difficult to define, let alone measure, so I may not agree with how they define them. Also, I have no doubt that if you could measure either, you would find variations in their manifestations. People respond to incentives and certain circumstances, such as artificially low interest rates, encourage or discourage the expression of greed. But at most they would vary around a mean because human nature does not change.

Don't assume that empirical data interprets itself. If something seems obvious to you, that's merely because you are operating with unexamined assumptions. Change the assumptions and the interpretation changes.

Finally, when I wrote that greed is a constant, I did not mean that its manifestation is exactly the same with all people at all times. As with gravity, certain things change its effect. Distance, for example, changes the effect of gravity, and rocket and aircraft can overcome its effects for awhile. But that doesn't mean they can eliminate gravity or that the law of gravity works differently at different times. In the same way, greed is always a part of all humans. Things like religion, counseling, government, etc., can reduce the effect, but never eliminate it.

fundamentalist writes:

wlu2009:

"If greed means the pursuit of self-interest..."

Actually, I don't mean self-interest. Self-interest is good; greed is self-interest carried to an extreme. That's why it's so hard to define.

Jackson may be arguing that in other day and age the high school grad mortgage broker would not have sold a family a mortage he knew they couldn't afford because it was unethica.

And that was partially my point. Yes, people are tempted to be more greedy under some circumstances than under others. That is why greed is not the cause of crises, but merely a symptom. The cause is the change in circumstances that encourages greed.

In other words, when looking for the cause of a cycle, you don't look for a constant, but for something else that cycles as well and the cycle for which varies in some type of correlation with the cycle of the effect. MCMM is a constant with human nature, but its effects are weaker or stronger depending on the circumstances. What looses the restraints on MCMM? For business cycles it is the reduction of interest rates and the expansion of credit.

At the same time, we have to keep in mind that much of the activity that people label as greedy behavior today was viewed at the time as merely enlightened self-interest. Greed, as least as used in the Bible, depends on motive and humans can't discern the motives of other humans. Only God can do that. As a result, the people we like we call their actions self-interest while those we don't like we call their actions greedy.

Judging the motives of others tells more about us than it does about the ones we are judging.

Troy Camplin writes:

Actually, the Bible is much more concerned with covetousness than with greed. Covetousness is the sin of the Left, to be sure.

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