“The greatest enemies of freedom are the extremely rich and the extremely poor, because one is willing to buy it while the other is willing to sell it.” ― Jean Jacques Rousseau, Social Contract
I watched ‘The Flaw’ this week (available on iTunes). The latest in a long line of documentaries that have sprung up in the aftermath of the 2008 financial crisis to offer an explanation. This one offers a refreshingly different route than, say, blaming bankers. Rather, leading behavioural psychologists and Nobel Prize-winning economists (and economic historians) try to open your eyes to something more fundamental and less tangible to blame: the fundamental way that global economies are structured. I think what’s scariest is that they use data from the early 1900s to show that we’ve been in exactly this credit crisis before.
In their words, banks are not to blame. Rather, we are all egocentric actors in pursuit of the greatest benefit for ourself. It’s the idea behind a capitalist driven free market. Dan Ariely is a professor of Psychology and behavioural Economics at Duke University. He says: ‘That’s basically what it means, we have lots of actors, each doing the best thing for them, and that creates some kind of social benefit for everybody.’ In other words, banks and bankers were doing what they perceived to be the best things for themselves, as did the recipients of ‘predatory loans’ who acted out of short-term self interest.
Yet the biggest mortgage companies, and indeed Governments around the world went bankrupt in 6 months. Hundreds of thousands, possibly millions, of people lost their homes. I guess the question is, where are the benefits? Alan Greenspan, former Chairman of the US Federal Reserve testified before congress: “I found a flaw, I don’t know how significant or permanent it is, and I have been very distressed by that fact. A flaw in the model that I perceive is critical to the structure that defines how the world works.”
The directors then tell us a story that links closely the relationship with income inequality with market failure. It’s a story about the 1% without all the rhetoric, and rather sensibly explained. “This crisis is a total failure of markets” says Joseph Stiglitz, Nobel Prize for Economics and Professor at Columbia. He continues,
What we are doing in effect is transferring money from people who would spend it, to people who don’t need all that money and don’t spend it… So the problem is that when you have growing inequality, your level of consumption goes down.
In other words, with increasing income inequality markets actually slow down. Remember that the next time a politician tries to sell you on the idea of protecting wealth in the name of trickle down economics.
If you have an hour and twenty minutes free over the next few days rent The Flaw on iTunes. It will be a $4.00 well spent, even if only to have that feeling you get somewhere in the first 20 minutes. That’s roughly when you begin to realise that what you’ve already been thinking is true: this system is absolutely broken, but perhaps the real-world alternatives are worse.
This is all really old wisdom. If you want a very short introduction into what binds people into rule-respecting societies and reasons why vast inequality should be eradicated, read Jean-Jacques Rousseau’s Social Contract (Available for Free here, or on Amazon Kindle for $1.88 here). Since 1762 he said the following words from which you can draw parallels to today’s leading economists quoted both above and in The Flaw:
In truth, laws are always useful to those with possessions and harmful to those who have nothing; from which it follows that the social state is advantageous to men only when all possess something and no one has too much.
― Jean-Jacques Rousseau, Social Contract