Finance as the Economic Equivalent of HIV
Capitalism presents many problems. One of the thorniest is the ability of capital to invade the structure of any attempt to reform it, turning it to destructive purposes. Economists often draw the moral from such outcomes that efforts to reform the market are destructive — evidence of what they call the law of unintended consequences.
The law of unintended consequences was one of the first discoveries of political economy. Usually, the purpose of invoking this principle was to demonstrate how the market worked to people’s benefit. The most famous example, of course, was Adam Smith’s invisible hand.
Finance is something altogether different, deliberately creating unintended consequences. Like the AIDS virus, finance can quickly adjust to almost any regulation. In addition, even the most well-intentioned regulation will have to pass muster with an army of lawyers, lobbyists, and political contributors before it can pass into law. Last-minute adjustments make it possible to insert little additions that make laws and regulations more favorable to capital.
Smith, Wealth of Nations, I.ii.2, pp. 26-7: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
Smith’s colleague, Adam Ferguson, suggested a more general application, writing:
122: “Every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments which are indeed the result of human action but not the result of human design.”
Ferguson, Adam. 1793. An Essay on the History of Civil Society, 6th ed., Duncan Forbes, ed. (Edinburgh: Edinburgh University Press, 1966).
Not surprisingly, the son of former prime minister Walpole coined the word, “serendipity” 1754.
At the same time, capital makes the control of destructive behavior necessary. Even in Smith’s day, bakers with attempt to improve their profits by adulterating bread — hardly an act of social beneficence and, perhaps, suggesting a different meaning for the invisible hand. Regulating bakers is not terribly difficult, so long as the public is able to commit a sufficient number of regulators to check on the bread.
In addition, bankers, accountants, lawyers, and even mathematicians and physicists can devise methods to skirt the intentions of virtually any regulation. Besides, modern communications allows people in finance carry on their business in other locations. For example, the tiny Grand Cayman Islands, where corporations outnumber the population, is one of the largest banking powers in the world.
Finance, in effect, can invade the DNA of any possible regulation, transforming it into a profitable opportunity that may be socially destructive. Of course, finance is not the sole source of such perversions, only the most effective because it is less tied down with physical capital. For this reason, neoliberalism is not so perversion of capitalism, but a natural tendency. Reforms can potentially help to protect the public for a while, without constant vigilance they are certain to erode.
Likes AIDS, this economic retrovirus will compromise the health of the system, as the current crisis demonstrates, but the economic immune system is also very powerful. As shown by earlier crises, capitalism demonstrates an ability to regroup. What doesn’t kill you can make you stronger.
The current crisis provides an opportunity for massive organization to try to take some control of the system away from being capital, without serious efforts, we’re going to see more of the corporate consolidations will make future progress more difficult.