The administration of the great system of the universe … the care of the universal happiness of all rational and sensible beings, is the business of God and not of man. To man is allotted a much humbler department, but one much more suitable to the weakness of his powers, and to the narrowness of his comprehension: the care of his own happiness, of that of his family, his friends, his country…. But though we are … endowed with a very strong desire of those ends, it has been entrusted to the slow and uncertain determinations of our reason to find out the proper means of bringing them about. Nature has directed us to the greater part of these by original and immediate instincts. Hunger, thirst, the passion which unites the two sexes, and the dread of pain, prompt us to apply those means for their own sakes, and without any consideration of their tendency to those beneficent ends which the great Director of nature intended to produce by them. – Adam Smith (from The Theory of Moral Sentiments)
I think everyone is focusing too much on the service aspects of both careers; the real difference between doctors and bankers is the mission of each. A banker exists to make a profit; a doctor to heal the sick. One is inherently self-serving, the other not.
Russell and I each wrote recently about the movement to stop inducing early births. The movement has everything to do with patient health; the old way was more profitable. What’s more, inducing early births led to complications, which led to more items a doctor could bill his patients for over time. The movement to eliminate non-medicaly necessary early birth has not been brought about by lawsuits, of government fines, or really anything that was damaging doctors financially. It is being done because it is better for the patient.
Bankers would not make a decision to improve the lives of their clients at the expense of their own profits. In fact, if they did they would be summarily fired – and we would all agree that this was proper and correct.
That is the difference between doctors and bankers.
Read it again, because we’re going to seriously deconstruct and qualify it.
At first I was dumbfounded by this comment’s truth-mass. I’m often tempted by intentionalism or grand strategy or other macro considerations (hereafter referred to as “missionism”), as if simply directing agents towards some constructed ideal is sufficient to solve most institutional problems. The following quote from F.A. Hayek – one of my favorite quotes – can perhaps be read in support of missionism, although it can be read otherwise:
“An experiment can tell us only whether any innovation does or does not fit into a given framework. But to hope that we can build a coherent order by random experimentation with particular solutions of individual problems and without following guiding principles is an illusion. Experience tells us much about the effectiveness of different social and economic systems as a whole. But an order of the complexity of modern society can be designed neither as a whole, nor by shaping each part separately without regard to the rest, but only by consistently adhering to certain principles throughout a process of evolution.”
In this light, let us unpack Tod’s comment and see whether the idea that it is the mission of doctors to be selfless and it is the mission of bankers to be selfish holds up to close scrutiny.
I. We must think of the professions as specialized services provided for a customer or client.
(1): I think everyone is focusing too much on the service aspects of both careers; a banker exists to make a profit; a doctor to heal the sick. One is inherently self-serving, the other not.
I disagree with this characterization. Who is to say a banker who allocates funds to only morally-praiseworthy causes doesn’t exist? Who is to say a doctor who practices medicine only to make money doesn’t exist (i.e. some plastic surgeons, doctors who treat only wealthy patients)? And who is to say that selfless bankers and selfish doctors are not net benefits to society? The only way to allow for the existence of such anti-mission professionals is to conceptualize the professions – banking and doctoring (and lawyering, blacksmithing, coopering, etc.) – as specialized services provided for a customer or client. And it is no wonder that, before the obsession with missionism and “proper roles” for discrete occupations that – I would argue – has plagued our society since the day we first imagined our best and brightest could design it all from scratch, one’s occupation was thought of simply as one’s “service”. Indeed, in many languages, the words for “serve” and “work” are one and the same. Society has always functioned most smoothly and most organically when professionals serve only their clients and not some overarching master or principle, where knowledge is local and specific, and deeds are performed for people and not institutions, abstractions, or policies.
II. The medical profession is an example of incentives working in phase with each other to foster a solid institutional structure that benefits all.
(2): Russell and I each wrote recently about the movement to stop inducing early births. The movement has everything to do with patient health; the old way was more profitable. What’s more, inducing early births led to complications, which led to more items a doctor could bill his patients for over time. The movement to eliminate non-medicaly necessary early birth has not been brought about by lawsuits, of government fines, or really anything that was damaging doctors financially. It is being done because it is better for the patient.
I’m not sure about this on a few different levels. First, I’m skeptical that inducing early births is always more dangerous than allowing nature to take its course. Granted, if the decision is based on the doctor’s tee time instead of the patient’s health, inducing early births is probably a bad thing; however, inducing early births remains a common practice in Japan, a nation which has a (far) superior public health record than we do, specifically when it comes to infant mortality. Empirically at least, it seems to me that the dangers of inducing early births is an area where evidence-based medicine leaves room for reasonable people to disagree.
Tod claims that the shift towards inducing fewer early births is occurring not because of any financial considerations but because it is a doctor’s mission to serve the health interests of the patient. I am aware that I may be making a straw man of Tod here, inadvertently, and apologize if I am. Yet, there are many cases where both the mission of the doctor and the interests of the patient align (and they almost always should align, really. This is a huge reason why I made the decision to become a doctor instead of a banker: I’ll rarely have to do something morally dubious in order to save my career.) However, it is also in the doctor’s financial best interest to secure the health of the patient; that is to say, there are very real financial considerations that are in phase with both what we morally expect from doctors and with what clients (i.e. patients) can be reasonably expected to desire as services. Having these different spheres of incentives in phase with each other is crucial, it seems, to the institutional robustness of the medical profession in the United States. To assume an intentionalist causality as Tod does is naive. The reason why we can take for granted that altruism motivates the actions of doctors is (perhaps) because it is in the financial interest of doctors to be altruistic. Yet, we will never know the true reasons why doctors continue to serve patients, because we’ve created a structure that does not allow for anything else, where all vectors point towards universally-desired outcomes. Good for us.
III. The banking sector is an example of incentives out of phase with each other to produce the present mess.
(3) Bankers would not make a decision to improve the lives of their clients at the expense of their own profits. In fact, if they did they would be summarily fired – and we would all agree that this was proper and correct.
Again, I strongly disagree with Tod on this. Many bankers – perhaps most bankers – would actually invest in the kinds of services that their clients demand they invest in. In an ideal world and in an ideal institutional structure, these bankers would secure reputations for meeting the demands of clients and thereby attract more clients. (In the sense that the actions of bankers in the real world may represent a net loss for society, whereas doctors are almost always good for society, whether or not this has to do with the proper mission or quality of service the banker provides is epiphenomenal to how that service manifests.) The real problem with the banking sector is that – unlike the medical care sector (I’d argue that health care, in contrast to medical care, suffers from some of the same institutional problems the banking sector does.) – different classes of incentives (those of the individuals directly involved, moral incentives, and those of society) are out of phase with each other. One of the side effects of this is that it actually has the potential to create a zero-sum game.
Many of the young analysts I know often don’t work for clients or don’t know their clients or they don’t have clients – they merely crunch numbers or create computer algorithms for faceless institutions to use to win at the margins. Their movements are really responses to policy more than they are investments in worthy causes. Thus, the present lack of clear economic policy, the lack of central direction, is what keeps aggregate investment stagnant and oscillating still today: institutionally, the banking sector has developed an addiction to central direction, and central direction may be the only way to get it working again.
Widespread dishonestly and malfeasance in the finance sector is an indication that there is something that is encouraging bankers to neglect their own long-term livelihoods in favor of short-term rewards. In short, the incentives are perverse. To correct them requires an institutional structure where (1) bankers serve clients, (2) individual financial incentives for such service exist, and (3) the outputs of the financial system provide a net moral benefit to society. Such is the kind of system Adam Smith described first in the Theory of Moral Sentiments and later in the Wealth of Nations.
IV. Towards a general theory of institutional health
I have argued here that to think of professions as anything but mechanisms for services provided for people is counter-productive and of net-negative value for society. I have examined briefly how the medical profession represents a healthy institution, where individual financial, societal, and moral incentives align. It is good financially for doctors to serve the interests of their patients. It is good for society to have doctors meet the needs of patients, and it is morally praiseworthy for doctors to serve patients. I have also argued that the banking sector, seen through this same framework of classes of incentives being in phase or out of phase with other classes of incentives, can be seen as a broken institution. We have created structures where it is in the financial interest of bankers to screw their clients. It is bad for society for bankers to fail to meet the needs of their clients. And it is doubtlessly a great moral crime for bankers to take money from clients while failing to provide the services they were payed to provide.
To fix the financial system in this country, we need to fix the incentives structure. This starts with creating incentives for bankers to serve clients, which may mean decentralization, policy or social changes. Additionally, we need to ensure that individual bankers are rewarded for such proper behavior and punished for negative behavior. Finally, we also need to ensure that the financial system benefits society (which really is just us in aggregate) by allocating funds towards causes which seem like they will benefit a great number of people (i.e. things which people are willing to pay money for, i.e. things which will increase the general welfare) instead of causes which will benefit only a small group of people (i.e. speculation, re-packaged assets, accounting tricks); this should naturally follow from the first two conditions in the manner described by Smith provided we establish the proper incentives.
The question is: how do we get there?