The Good, The Bad & The Ugly

A few articles on the economy that were sent my way recently.

The Good: After Capitalism (Geoff Mulgan)

The era of transition that we are entering will be disruptive—but it may bring a world where markets are servants, not masters.”  I urge you to read this entire article, and leave your ideological biases at the door.  Despite the title, this is no polemic.  Here’s the punchline:

Contemporary biology and social science has confirmed just how much we are social animals—dependent on others for our happiness, our self-respect, our worth and even our life. There is no inherent contradiction between capitalism and community. But we have learned that these connections are not automatic: they have to be cultivated and rewarded, and societies that invest large proportions of their surpluses on advertising to persuade people that individual consumption is the best route to happiness end up paying a high price.

Here are some reality checks for the Left:

  • ‘philanthrocapitalism,’ the idea that the rich can save the world, may not survive the crisis
  • “Propping up failing industries is… a risky policy.”
  • “If another great accommodation is on its way, this one will be shaped by the triple pressures of ecology, globalisation and demographics. Forecasting in detail how these might play out is pointless and, as always, there are as many malign possibilities as benign ones, from revived militarism and autarchy to stigmatisation of minorities and accelerated ecological collapse.”
  • “Another intriguing part of this story is the growth of capital in the hands of trusts and charities, which now face the dilemma of whether to use their substantial assets (£50bn in Britain) not just to deliver an annual dividend but also to reflect their values. Bill Gates found himself at the sharp end of this dilemma when critics pointed out that the vast assets of his foundation were often invested in ways that ran counter to what it was seeking to achieve through its spending.”
  • “Obama should be ideally suited to offering a new vision, yet has surrounded himself with champions of the very system that now appears to be crumbling.”

And here are some for the Right:

  • “40 per cent of the investment in Silicon Valley came from government”
  • “Daniel Bell… [argued] that capitalism would erode the traditional norms on which it rests—willingness to work hard, to pass on legacies to children, to avoid excessive hedonism. Japan in the 1990s was a good case in point—its slacker teenagers rejecting their parents’ work ethic that had driven the economic miracle. “
  • “But the new technologies—from high speed networks to new energy systems, low carbon factories to open source software and genetic medicine—have a connecting theme: each potentially remakes capitalism more clearly as a servant rather than a master, whether in the world of money, work, everyday life or the state.”
  • “It’s an irony that so many of the measures taken to deal with the immediate impact of the recession, like VAT cuts and fiscal stimulus packages, point in the opposite direction to what’s needed long term. But there are already strong movements to restrain the excesses of mass consumerism….”
  • “Reinforcing these trends are shifts in the balance of the economy away from products and services, towards a ‘support economy’ based on relationships and care….”
  • “Knowledge too is dividing between capitalist models and cooperative alternatives…. The creative commons approach is gaining ground in culture as an alternative to traditional copyright and Wikipedia has become an unlikely symbol of post-capitalism.”
  • “…there has been a long-term trend towards more people wanting work to be an end as well as a means, a source of fulfilment as well as earnings.”
  • “Governments may also be drawn further into financial services…. [Denmark and Singapore] have created personal budget accounts for citizens, and it’s not hard to imagine some offering services where people can borrow money for a period of retraining, parental leave or unemployment, and then repay through the tax system over 20 or 30 years, or through a charge on homes, with much lower transaction costs than the banks.”  [ sounds familiar :-) ]
  • “The building societies [I assume this means “developing economies” in American lingo?] that didn’t privatise have survived far better than those that did. Charities tend to survive recessions better than conventional businesses and Britain’s 55,000 or so social enterprises may bounce back faster than firms without a social mission.”

What I like best about Mulgan’s essay is the nuanced long-term historical view:

In this essay I look at what capitalism might become on the other side of the slump. I predict neither resurgence nor collapse. Instead I suggest an analogy with other systems that once seemed equally immutable. In the early decades of the 19th century the monarchies of Europe appeared to have seen off their revolutionary challengers, whose dreams were buried in the mud of Waterloo. Monarchs and emperors dominated the world and had proven extraordinarily adaptable. Just like the advocates of capitalism today, their supporters then could plausibly argue that monarchies were rooted in nature. Then it was hierarchy which was natural; today it is individual acquisitiveness. Then it was mass democracy which had been experimented with and shown to fail. Today it is socialism that is seen in the same light, as a well-intentioned experiment that failed because it was at odds with human nature.


In Perez’s account economic cycles begin with the emergence of new technologies and infrastructures that promise great wealth; these then fuel frenzies of speculative investment, with dramatic rises in stock and other prices. During these phases finance is in the ascendant and laissez faire policies become the norm. The booms are then followed by dramatic crashes, whether in 1797, 1847, 1893, 1929 or 2008. After these crashes, and periods of turmoil, the potential of the new technologies and infrastructures is eventually realised, but only once new institutions come into being which are better aligned with the characteristics of the new economy. Once that has happened, economies then go through surges of growth as well as social progress, like the belle époque or the postwar miracle.

hat tip: @TEDchris (Chris Anderson)

The Bad: Companies Reset Goals for Bonuses (Jonathan D. Glater)

When executives have a tough time meeting their performance goals, a growing number of companies are moving the goalposts for them….

Companies generally point to the economic downturn and argue that this year, missing the kind of performance targets used in the past does not result from poor management. It would be unfair to withhold pay from executives, in this view, because they may be doing a good job while circumstances beyond their control sabotage their efforts.

For the counter-argument, read my post on the topic.

hat tip: Jay Greenspan

The Ugly: Our Epistemological Depression (Jerry Z. Muller)

I’m not actually linking to this article for two reasons.  One is I don’t want to promote it since I think the arguments are specious.  Telling is the editor’s note at the end:

Editor’s note: Amar Bhide has asked that it be noted that some of the ideas in this essay draw upon his articles, “An accident waiting to happen,” which appeared on his website, and “Insiders and Outsiders,” which appeared on

I encourage you to read Bhide’s articles linked above because they are actually quite good.  From the Forbes article (emphases mine):

American industry–businesses in the real economy–long ago learned hard lessons in the virtues of focus. In the 1960s, the prevailing wisdom favored growth through diversification.  Many benefits were cited. Besides synergistic cost reductions offered by sharing resources in functions such as manufacturing and marketing, executives of large diversified corporations allegedly could allocate capital more wisely than could external markets. In fact, the synergies often turned out to be illusory, and corporate executives out of touch. Super-allocators like Jack Welch and Warren Buffett were exceptions….

Predictably, taxpayers are footing much of the bill for the misadventures in diversification.  Regulators, who looked the other way while bankers put the public’s deposits at risk and brought the nation’s economy to its knees, now have an opportunity to redeem themselves…. Instead, they are encouraging more diversification, hoping to bury, for instance, Merrill Lynch’s unknown liabilities into Bank of America’s impenetrable balance sheets, and–in spite of their past failures with the likes of Citicorp–welcoming the creation of more megabanks. This is rather like giving the addict in the ER more drugs. It may soothe the tremors, but it isn’t a long-term solution to the diversification debacle.

It’s important to note that “diversification” in this context refers actually to consolidation, in other words, individual companies trying to do too many things and losing the efficiency that would have been present in the marketplace if these diverse interest remained independent.

In contrast to Bhide’s lucid argument, here’s Muller’s twisting of the same:

The diversification of investment, which was intended to reduce risk to institutional investors, ended up spreading risk more widely, as investors across the country and around the world found themselves holding mortgage-backed American securities of declining and indeterminate value. There was a belief in the financial sector that diversification of assets was a substitute for due diligence on each asset, so that if one bundled enough assets together, one didn’t have to know much about the assets themselves. The creation of securities based on a pool of diverse assets (mortgage loans, student loans, credit card receivables, etc.) meant that when markets declined radically, it became impossible to determine an accurate price for the security.

This is completely wrong.  The issue wasn’t spreading risk more widely and the concomitant inability to accurately price securities.  The issue was that the financial wizards forgot to check how correlated the underlying securities actually were, convinced themselves with over-simple models that there was no correlation, ignorantly applied leverage, and hence increased risk to everyone.  There was no “spreading of risk” whatsoever.

Muller would have been better off just plagiarizing Bhide directly, that way he’d at least get the argument right.

hat tip: Daniel Horowitz

  • Daniel Horowitz (who pointed me to the Muller article) mentioned that he saw it originally here in this David Brooks article. Oddly enough I hadn’t read the Brooks article before posting this, but we seem to agree on a lot (especially whom to reference). Except he loves Muller’s article and I hate it.

    Also, I disagree that we have to choose between the greed narrative and the stupidity narrative. Just because accepting both gives us an unclear way forward doesn’t make one true and the other false.