Economic Bubbles -- and an Overlooked
Distinction
by Steve Talbott
I have a question for economists. It's a question that might have been asked at any time over the past century or so, but gains particular poignancy in our current state of economic perplexity. Why does a certain obvious distinction not figure more centrally in economic theorizing - namely, the distinction between the application of capital in order to increase that capital itself, and its application in order to achieve something worthwhile in the world? Or, more simply: why do we not distinguish between using money to make money, or using it to do meaningful work?
Granted, the distinction can at times be rather subtle. Every business needs to "make money". It's the difference between survival or dissolution. That is, it's the difference between success or failure in the organization's chosen work. And so "making money" in this sense becomes a prerequisite for using money to do meaningful work.
This is as it should be. But it's an entirely different matter when the immediate and primary aim of the doing is to make more money - that is, when making money becomes an end in itself rather than a necessary consequence of our succeeding at our work in the world. The goal then becomes purely abstract and mathematical. Money begins to chase its own tail, circling around and engorging itself upon itself.
One might argue that the only way money can multiply itself is by doing useful work in the world. But this is patently false, and the falsifying evidence is by no means obscure. In the subprime mortgage mess and the ensuing credit crunch we've seen as vividly as possible how money's pursuit of its own increase - while temporarily successful for some people and businesses - can be founded upon anything but real value. It just seems painfully obvious that the more our focus shifts from particular desirable work to a quantitative concern for money as such, we lose the only rootedness, the only reality principle, that preserves us from repeated episodes of economic chaos.
From personal savings to pension funds, from stock markets to currency exchanges, from commodities to hedge funds, the amount of money "invested" in the usual sense of that word has in recent decades grown explosively. Money's pursuit of its own increase has become such a big thing in our society - so customary and all-enveloping, so doctrinally fundamental - that to question it will seem bizarre to many people. Doesn't the investment industry - a significant chunk of our entire economy - see itself as dedicated almost solely to the art of multiplying money? How many of us, when we invest our money in stocks, ask what the money will accomplish in the world rather than what its rate of return will be? And aren't most corporations in the business of maximizing profits first of all, rather than performing a task for the sake of which they try to remain at least minimally profitable?
Yes, it requires a little subtlety to sustain the distinction between the pursuit of monetary gain and a striving to accomplish something worthwhile. But economists are nothing if not subtle, and the task is hardly beyond them. And in this matter the underlying difference at issue, however subtle its playing out in particular circumstances, is in principle as dramatic as it could possibly be. Everyone can immediately recognize the incompatibility of the two stances.
Moreover, money chasing its own tail sounds rather like the very definition of an economic bubble. Untethered to reality, such money will follow any scheme that is, for the time being, profitable. It matters little whether the scheme involves subprime mortgages or an investment plan based on the monthly, weekly, or even daily upslopes and downslopes of a stock market graph. When the immediate connection between money and useful work is in this way severed, we lose the means to distinguish a sound enterprise from a bubble - as in fact virtually all economists failed to foresee the current crisis. This is not so much a failure of foresight as acquiescence in economic realities that make foresight impossible. No matter how assiduously regulators seek to address previous excesses by strapping safeguards around the economic balloon of our economy, the money-seeking investor will be driven to invent ever new strategies and the balloon will simply bulge outward in new and novel places.
As the conventional faith in investment for its own sake continues to grow and dominate the economic practices and institutions of our society, we may well find it ever more difficult to prevent entirely unpredictable crises from arising. The dot-com bubble featured a dramatic rise in participation by small players, including day-traders, and the economy hardly managed to recover from that fiasco before this new one took root. I suspect that there is only worse to come if we cannot, as a society, recognize that the success of capitalism hinges upon individual creativity in doing meaningful work, not creativity in money-making for its own sake - and that the two are powerfully at odds with each other. This is hardly surprising, since the two aims come from radically different places, morally and otherwise, in the human being and therefore lead to different patterns of action - something you would think scientific-minded economists ought to pay attention to.
Somehow the fiction that profit automatically translates into real accomplishment, into real value for society, prevails no matter how evident its fallacy - no matter how evident the truth that, for example, one can make at least as much money selling cocaine as selling penicillin. Moreover, bubbles, which economists have never found any agreed-upon way to explain, continue to occur, and they always involve the disastrous absence of real value in favor of vacuous, mathematical profit (to which investors easily become addicted). It's about time we faced this fact squarely, and explored the significance of the inevitable disconnect between the mere drive for return on investment and the effort to accomplish something substantial in the world. And then we will need to ask ourselves further: how can we as a society discourage this disconnect rather than strive to maximize it as we have now been doing for many years.
The economist's reluctance to deal with this issue is presumably related to the fact that here we come up against moral qualities. But I guess the only proper response to such reluctance is, "Welcome to the real world".
NetFuture, a freely distributed electronic newsletter, is published and copyrighted by The Nature Institute. The editor is Steve Talbott, author of Devices of the Soul: Battling for Our Selves in the Age of Machines. (http://natureinstitute.org/txt/st). You may redistribute this newsletter for noncommercial purposes. You may also redistribute individual articles in their entirety, provided the NetFuture url and this paragraph are attached.
