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Monday, December 08, 2008

Is the Crisis a Moral Issue?

Can the crisis be fixed - or the next one avoided - without addressing the moral issues that caused it?:

Markets over morality, by Guy Dammann, Comment is Free: Does the free market corrode moral character? ... [L]ibertarian (broadly speaking) Indian economist Jagdish Bhagwati ... didn't really think that morality had much to do with it, or with anything else for that matter. ...Although he assiduously avoided the issue (reasonable, given that he doesn't see it as an issue), it was in fact Bhagwati who spoke what seemed most to resemble the truth of the matter. The crisis, while it affects the well-being of all of us, is being experienced by those in power (arguably the banks themselves rather than the politicians) as a financial and not as moral matter; and they intend to fix it as such. I've certainly seen no evidence to the contrary...

Was the financial crisis the result of maximization gone awry - people operating within an imperfect set of rules that allowed the pursuit of self-interest to expand into a bubble, essentially Brad DeLong's "most likely and fruitful road ... to understand this financial crisis: the road that starts from investigating how human psychological limits lead to bad private-sector contract design that then magnifies psychological biases"? Or was it an intentional, conscious manipulation of the system, i.e. immoral behavior, knowing attempts to bypass the explicit and implicit social rules for personal gain?

I think bad system design is at the heart of the crisis, and flaws in the design allowed and encouraged immoral behavior, behavior that exploited profitable opportunities within the imperfect system (which does not excuse the bad behavior).

Were the flaws in the system the result of markets corrupting our morals? I think we relied too much on markets to regulate behavior, i.e. as a means of enforcing morality on agents operating within market systems, and we paid too little attention to the need for oversight. But the flaws in the system that created the bad incentives were not, for the most part, the result of moral shortcomings, they resulted from human shortcomings, unintentional mistakes in the design of the system that come from our "psychological limits".

But I'm not at all satisfied with that explanation. Help!?

    Posted by on Monday, December 8, 2008 at 09:27 PM in Economics | Permalink  TrackBack (0)  Comments (73)


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