Charles Handy, founder of the London Business School and prolific writer and academic, gave some pointers as to how we can keep our economy stable after we have gotten out of our current rut in a recent interview. Among his suggestions (none of which are anything new, just seldom repeated to the misfortune of society):- break up the banks: Large banks lead to large problems. In other words, we have gotten to the point where we have a handful of banks that offer each and every financial product available. Banks now are so big that they are too big to be allowed to collapse because of the havoc that would ensue (there are plenty of examples of this!). The key is to keep banks from getting that big in the first place. Investment banking and retail banking, among many other varieties, must be kept separate, as they used to be. If this doesn't happen by market force, then the government might just have to step in and do the job itself.
- live like humans are meant to live: Mr. Handy rightly points out how absorbed we have become in making money. This greed has not only led to 60-hour workweeks, loss of family time, and failure to take a real vacation, but it has also led to the mess we are now in. What else other than the lust for more profits would have led to banks, appraisers, and mortgage brokers to allow sub-sub-sub-prime mortgages to be approved? The concept of a bank is to take money from those who have it and lend it to those who don't but can use it productively. When banks lend more money than they have to people who can't use it productively (e.g. buying an overpriced house), we have depression.
9 comments:
The greed for profit is what drives innovation and improvement in society.
Also, blah blah blah the government caused all these problems... the government should let the market work... consumers will go to whatever bank they like most... etc
Profit motivation is what drives innovation and improvement, but excessive profit motivation undeniably leads to failure.
Usually excessive profit motivation can be kept under control by some pressures working against it. It has a high cost (time away from home, stress, depression, etc.) for one. Another pressure that usually keeps profit motivation from leading to the mess we're in now is the free market. If a company becomes too greedy and verges on collapse (e.g. so many of our favorite banks), it should collapse; it deserves the consequences of its actions.
But it can't collapse, because the government has set too loose regulations governing how many hats a single entity can wear, so these banks are huge. As counterintuitive as it mays seem, we've skewed capitalism so much by deregulating. This is why smaller banks are necessary, even if it means government intervention to break up large corporations.
We've skewed capitalism by regulating.
In a free market how does someone make profit? By providing a good or service to consumers that the consumers want - by making the lives of the consumers better. "Excessive profit motivation" then just means you are working harder to improve the lives of everyone else by providing something they want (because that's what will make you money).
Of course, we don't have a free market. There are so many regulations and government interference that one of the primary ways for many companies to profit is by lobbying the government.
The point is, if people want a bank that wears many hats, they will go to a bank that does so. If people want smaller banks, they will go to smaller banks. No company is too big to fail.
Of course there is probably some regulation that prevents smaller banks from starting easily...
The only problem with that is that often times the consumer is ill-educated as to the best choice or doesn't care. Per tragedy of the commons, a consumer will often do stupid things for themselves at the expense of society. And, as the bank (or other business) wants the quick buck, they will oblige them, regardless of the future ramifications. This can be seen with something like fish stocks in the Mediterranean, which are now on the verge of collapse because fishermen don't care about overfishing now causing stock depletion.
The people that bought into investments that bundled sub-prime loans did not know what they were buying. Banks didn't know what they were selling. Things got so complicated that there was and is no way to trace many of the transactions that occurred and whose collapse precipitated the financial crisis. This could have been prevented with regulations requiring transparency. I would be willing to bet that many banks and investors would not have bought many of the securities they did buy if they had really known what was in them.
Hmmm... maybe people should KNOW WHAT THEY ARE BUYING???????? Who makes an investment like that? Regardless, people got pulled into the bubble created by the federal reserve.
Also, that would be the free market at work. People who make these bad investments (where they don't know what they're buying????) lose while people who make sound investments gain. This leaves only the good firms standing..... oh wait BAILOUT TIME!
Tragedy of the commons only illustrates why common property is bad.
I'm not sure I understand what you said about consumers. Consumers buy what they want to buy and I don't see what is wrong with that.
What I meant is that when it comes to things like good environmental practices, good labor practices, etc., consumers often don't care because they are not directly impacted by their purchase. Case in point: someone buying something cheap at Wal-Mart doesn't directly suffer from the bad labor conditions in China and doesn't care because they're getting some cheap item. While product quality will be corrected by market forces (people won't buy inferior products), labor standards never will be if the consumer doesn't care. This doesn't mean that there should be bad labor standards though. This constitutes a market failure and must be corrected by regulation. This is, in my opinion, the only time when business should be regulated.
While I agree with you that those who make bad investments should fail (I've little sympathy for the bailed-out banks and even less for the auto manufacturers), I'm not sure I follow you on common property. I'm not referring to the whole town owning a grazing area, but things like the ocean, which cannot be owned, but is used by many for its resources.
I think the ocean or at least sections of the ocean could be owned.
Also, I don't think there is anything wrong with people not caring about labor conditions.
Furthermore, I think that as long as workers are free to quit their job, there can't be any such thing as exploitive sweatshops or whatever. People in china working for low wages are doing so by choice (they could choose to not work, or try to get a different job etc). So they prefer working, even if the wages seem low by our standards. Minimum wage laws create problems because they interfere with a voluntary contract and also because they cause unemployment when people who would be willing to work for less are fired since they aren't productive enough.
Yes, you are right: Workers in sweatshops working below any semblance of minimum wage in unsafe conditions and no job security are there entirely voluntarily.
They voluntarily go to work every day in order to voluntarily make money, money they voluntarily use to feed their families, provide shelter, and buy material for clothing. I suppose if you consider it, living life itself is an entirely voluntary proposal.
Yeah pretty much.
Don't forget that minimum wage laws would cause some of those people to be totally unemployed. Is that better? Clearly not since they chose to work rather than remain unemployed.
I'm not sure what "solution" you could propose... if you think foreign labor is undervalued, it would be a great investment opportunity to build some factories there and pay a higher wage (so you get a lot of people that want to work for you).
Regardless, it can't really be exploitation if it is voluntary and people can leave their jobs at any time.
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