even this ship needs steering

Via Andrew, Felix Salmon pokes holes in a list of necessary reforms from Nassim Taleb:

Taleb’s first principle is that “nothing should ever become too big to fail”. But all economies have too-big-to-fail institutions; they always have, and they always will. Looking at the rest of the list, how on earth do you stop the financial sector from awarding its employees bonuses, or creating complex products? Derivatives are, at heart, bilateral contracts: how can you ban two consenting adults from entering in to such a contract?

But something’s missing here too, right? Yes, Salmon is right, I don’t know how you could prevent that kind of contract, and I’m not sure you’d want to. But remember the ultimate point: these were catastrophically, economy-destroyingly bad contracts, made again and again and again, by a host of actors, across a large industry and with many different lines of investment. And they have come close to running our whole economy off the rails. So why is it weird, to me, for Salmon to now be questioning whether we can discourage these kinds of deals?

Because for years, we’ve been told that we would never have to. The stock response for so long has been that the boys in the back room were geniuses, and more importantly, that capitalism itself would prevent the kind of enormous interconnected risk that has driven us to the edge of economic apocalypse. Too many rational people working for their own best interests, under the constraints of only the profit motive, would prevent the kind of wild risk-taking and lack of basic responsibility that led us here. That was a line enforced by both economic conservatives and neoliberals, and the failure to concede it risked relegating one to the status of anti-capitalist. The markets just wouldn’t let this sort of thing happen.

Now, we’ve walked back from an era of capitalism’s inherent wisdom and self-regulatory power to the point where a blogger at the Financial Times Reuters (fixed) can ask seriously if there is a way to prevent individual capitalist actors from forging private agreements. But have we really walked back far enough? I suppose you could say that what I’ve written so far is merely a banal statement of recent conventional wisdom. What I find myself wondering at, though, is often how little many of the basic perspectives on our democracy and our economic future seem to have changed. You are just as likely to hear about the supreme rationalism of the system and the inherent strength of the competition of the self-interested now as you were before the system ate its own tail. Perhaps more, because many enthusiastic, aggressive capitalists see, in the calls for further regulation and a reevaluation of our commitment to moderation and sense, not the natural and conservative response to a genuine crisis, but the long arm of communism, reaching once again out of its grave, to strangle the hard-working John Galts of the world…. It’s a strange fact of capitalist rhetoric that those who believe most in the system seem to view it as the terribly vulnerable.

To me, the most sensible and pragmatic capitalist is a skeptical capitalist, one who recognizes the enormous power for good in the system but also recognizes that it is ultimately just a patchwork of conventions, laws and mores, cobbled together by disparate people with vastly different aims, and existing always in an uneasy tension. That, to me, is a simple statement of the reality of life, of human systems and their imperfections. It’s not a socialist screed or an endorsement of some sort of anarchistic future. Yet in the context of American political and philosophical conversation of the last decade, it’s tantamount to carrying Mao’s little red book.

We’ve lived through an era filled with belief in a kind of magic, a belief held by many who would consider themselves the most rational among us. This belief held that unlike every other system we’ve ever devised for understanding or moving through the world around us, the capitalist enterprise had within it a kind of perfection. Not that many would be so crude as to say that capitalism had no victims, although occasionally you heard just that from the more rabid of the Ayn Rand crowd. But many have and continue to talk about the great engine of currency exchange and private ownership as a self-regulating, self-repairing vehicle that, left to its own devices, will proceed inexorably closer to security and abundance towards all. Many of the people who believe that, I have to be quick to point out, believe with their whole hearts that economic growth is the real way to bring about lasting improvements in the lives of the most vulnerable and poor. To their credit, those people endorse the views they do because they think it will help the poorest.

But they’ve allowed their great enthusiasm for a worthwhile enterprise to create a lack of discrimination and an inappropriate credulity. They’ve fallen for their own utopianism. Again, very many of them have done so with entirely pure motives and in good faith. They need to evolve, though, we all do, to see that this system works only so far as we force it to work, with cajoling and nudging and, yes, sometimes strong-arming. There is no guarantee that this thing of ours has to take us to greater equality and happiness. Only people can ensure that, and only if they recognize the terrible burden of responsibility that such a powerful and totalizing system as capitalism represents.