[iDC] The ethical economy and the current financial meltdown

Sat Nov 1 06:26:45 UTC 2008

(an excerpt from the Ethical Economy book by Adam Arvidsson, sneak preview at www.ethicaleconomy.com)

Ethics, Finance and Crisis,

These might seem like three terms picked at random. However I would
like to suggest that beyond its direct, contingent causes, the current
financial crisis is a symptom of the emergence of a new economic
system, where value is increasingly based on ethical factors, or on
‘life conduct’. I call this an ethical economy: and I will try to
explain why, and how it relates to the current crisis.

The last ‘Great Crisis’ that lends itself to (imperfect) comparison
with today’s events was the Crisis of 1929 followed by the Great
Depression of the 1930s. The Great Crisis was triggered by an
over-valuation of industrial stock which had accelerated during the
post-War boom of the ‘roaring twenties’. Industrial profits, private
savings (and borrowed money) were pumped into stock markets where stock
prices were inflated. Like today this exuberance produced a situation
where nobody really knew what the stocks were actually worth. Instead
their value were related to the overall tendency of the stock market to
keep rising. So the basic mechanisms behind the bubble and crash (like
in all bubble crash and cycles) was the absence of a measure of the
real value of stock, and its replacement by a self-referential measure
that related the value of stock to the presumed future dynamics of the
stock market itself.

The post-War, Keynesian solution, which served to guarantee a
relatively smooth financial development up until the oil crisis of
1973, and the following neo-liberal deregulation, was premised on the
establishment and institutionalization of such a measure. This happened
through the Fordist compromise between capital and labour, which
institutionalized the productivity of industrial labour as the
established measure of all economic values, including the value of
stock. This establishment of an institutionalized measure happened
through a democratization of the standards of value. Up until the
1930s, the people had no insight in the ways in which economic value
standards were set. Instead such standards were set by a small minority
of market operators who followed what we would today call a ’swarm
logic’. With the Fordist compromise, popular representatives
(principally the labour movement) came to have a say in determining
what standards of values should prevail. This way these standards also
acquired a wider democratic base, which made them enduring and robust
as they now corresponded to what was a shared view of what constitutes
‘real value’.

Today, the dynamics leading up to the financial crisis are very much
the same. We have seen an exploding share of immeasurable values that
are capitalized on on financial markets (so called ‘intangibles’) and a
generalized insecurity of the ‘real values’ of the assets that back the
various kinds of securities that circulate. As a consequence, the
credit and real estate boom that preceded the crisis was premised on a
self-referential pricing mechanism: The value of a house was thought to
be determined by the continuous upward movement of the housing market.
Like in 1929, there is no democratic influence on how the standards of
value for these kinds of assets are determined, and hence no way of
guaranteeing that they correspond to a shared view of what constitutes
‘real value’.

But the today the assets are different form those of the 1920s. The
most important assets in todays financial crack - mortgage-backed
securities, credit card debt and many intangibles, like brand values
are essentially securitizations of what we could call ‘life conduct’.
The value of a mortgage or of  credit card debt depends on the life
conduct of the borrower. The value of a brand depends on the life
conduct of consumers (this is actually what is measured in brand
valuation schemes) and of the ethical conduct of the company that owns
the brand; the value of a real estate market depends on the life
conduct of  the inhabitants of a neighborhood or a city- after all this
is what ‘creative city’ policies are all about. And to a large extent
the productivity of a knowledge intensive company is about the
life-conduct of its employees. So in many ways current financial
markets build on the direct securitization of life-conduct, of
ethically coherent forms of life. Swiss-Italian economist Christian Marazzi pointed this out long ago. Looking at the New York financial crisis of
1929, for many the origin of the neoliberal era, he showed how the
privatization of city debt (through city bonds sold to the middle
classes) gave a direct economic importance to the life-conduct of the
poor. This, he argues, was the origin of the neoliberal era with its
combination of freedom of private property and discipline for the
propertyless.

So the present crisis was preceded by a boom that built essentially
on the securitization of life conduct, where the ethics of everyday
life became a direct foundation of value. Like in the 1920s, however,
the crisis resulted form a lack of rational measurements of the value
of such forms of life conduct. What kinds of lessons can we draw form
this?

Many voices on the left (and on the right) speak of a severe
restriction of the power and freedom of financial markets. This is
probably not a good idea. There are many reasons that suggest that a
financial distribution of value is in fact a functional response to a
situation in which the production of wealth is thoroughly socialized
and operates through the putting to work of social capital and what
Marx called General Intellect, rather then through the direct
deployment of labour time and private capital. In this sense financial
markets serve to distribute a global surplus, which is essentially
produced in common. What we need is a democratization of the standards
of value. We need established, generally accepted standards for how to
value forms of life conduct to underpin a rational valuation of the
securities that they support. How can this be done? A centralized
authority build around the state, like in the Fordist compromise is
simply not possible. Furthermore, standards of life conduct are
multifaceted, so that a rational measurement requires a multitude of
points of view. This seems like a task for the collective intelligence
of the networked multitude! My suggestion would be to use social media
platforms that combine the functions of networking and rating. (These
are already emerging, networking sites like Facebook are enormously
popular; according to the PEW Internet and American life project in September 2007, 32 per cent of the US internet population had rated
a person or product online) If E bay is able to give a rational and
generally accepted value to the life conduct of its users (is the
seller trustworthy or not?), then something similar could perhaps work
for financial securities? Consumers, workers and other stake-holders
involved in the globalized production of a branded commodity
continuously rate the social impact of the brand. Their ratings are
aggregated into an quantitative index that serves as an input for
financial operators. When I go to the bank and ask for a mortgage I
present a quantitative ethical index that summarizes what people in my
networks think of my trustworthiness and general life conduct. That
index affects the interest rate I would have to pay on my loan, and
consequently the risk and price of the security that the bank
subsequently derives from the mortgage An ethical economy? An Orwellian
nightmare?
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