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Category: Economics

Distribution / Economics / Old Blog

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Rewards and Responsibility in the Banking Sector

The source of a particularly spirited 4-hour debate in a bar in Istanbul with Will Abel (we know how to have fun) – I thought I would bring this debate to a broader discussion in, dare I say it, a more intellectually rigorous environment.
In the lead-up to the financial crisis of 2007-8, senior executives at investment banks oversaw a system in which their firms reaped substantial rewards for selling products which they knew would ultimately lead to substantial losses for whichever firm was left ‘holding the buck’. The result of these actions we know all too well: an international financial crisis which has negatively impacted the livelihoods of billions of people worldwide.
The low number of criminal prosecutions for these actions appears to be due to a combination of the complexity of the financial products involved, the widespread and interconnected nature of the transactions and the fact that it is notoriously difficult to prove harmful intent.Thus, while their actions were dishonest, immoral and reckless, they were not technically illegal.
If a doctor were to knowingly take risks when treating a patient and that patient were to be adversely affected as a result, the doctor would be criminally liable for their actions. Likewise, if an individual takes the risk of driving when overtired or intoxicated and injures another person as a result, the driver would be criminally liable. Yet, in the case of banking, we require an additional proof of intentional malfeasance in order to prosecute.
At the current time, senior banking executives are entitled to large scale benefits while passing on the risk to their shareholders, the taxpayers who are (effectively) forced to bail them out, and a global community which relies on a banking sector in order to function. Sanctions, meanwhile, have focused on fining the offending institutions – punishing shareholders and reducing banks’ ability to lend to individuals and small businesses – rather than the individualswho ultimately made these decisions. 
I move that, given the banking industry’s importance to society and the large benefits bestowed upon its senior custodians, they have a responsibility to avert such systemic levels of risk and should be legally liable for creating such levels of risk, regardless of intentional malfeasance. Not only is this a more just alignment of power and responsibility, it is a more effective way to deter reckless behavior in the future, thereby benefiting society more broadly in the long term.
Admittedly, there are difficulties in defining exactly what level of risk is palatable for society, assigning responsibility to specific individuals (since in this case the practice was so widespread) and how to deal with rogue traders such as JP Morgan Chase’s Bruno Iksil. To an extent, however, I think that these issues can be resolved on a case-by-case basis – in a sector which perennially finds new and innovative ways to make money this may even be preferable. But by establishing a precedent that not just intentional malfeasance but a negligent attitude to risk is an illegal act, we can develop a more just reward-responsibility balance and protect the interests of society from the excesses of the few.
Finally, as much as I still hope to see prosecutions brought against individuals whose actions led to the 2007-8 crisis, I do not advocate for retrospective punishment and would intend for the standards outlined above to implemented only moving forward. As frustrated as I have been by the lack of widespread prosecutions, I take solace in the fact that the rule of law has been upheld in the face of strong public pressure. Conducting prosecutions based on retrospective law changes could ultimately create a broader ‘chilling effect’ on society which would be contrary to my intentions.

Economics / Old Blog

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The Moral Limits of Markets

In August 2012 five people went on trial in China for facilitating illegal organ trading after a student was found to have sold his kidney in order to buy an iPad. In the subsequent reporting of the incident, the case was held up as an example of the foibles of a world obsessed with consumption; a world in which everything has a price. Even though I agree that such transactions should be prohibited, the focus on whether or not people are materialistic somewhat misses the point. The salient question is not to do with the morality or immorality of consumerism, but rather a question about the boundaries of legitimate state intervention in the affairs of private individuals.
I’m going to outline a couple of reasons there may be for wanting the state to stop these sorts of transactions. One reason is that if a market in a particular good or service corrupts the social meaning of a good, then it is legitimate to restrict the sale of that good.  The main problem with this argument is that it is quite illiberal. It can permit the Institutionalised restriction of the rights of citizens on the basis of reasons with which they may radically disagree, even if those rights have no harmful implications for anyone else. So, for example, the argument could be deployed in a country where a majority of Christian citizens object to the sale of kidneys on religious grounds. The Christian citizens may attempt to restrict the commodification of kidneys because they believe that Cup human organs are a sacred gift from God which should not be ‘corrupted’ by monetary valuation. Now consider if there was a minority of atheists in this country. The atheist minority can reasonably disagree with the religious justification for the laws restricting wholesale nba jerseys their choice to sell their kidney. The atheist minority could protest that they are not being treated as equals; a comprehensive doctrine that they do not accept is being used to restrict their liberty. They are not being permitted Markets to act as they choose, despite these actions having no harmful implications for any other members of society. 
A second (and better) reason for restricting markets is that people may only sell particular types of goods or services when they were in situations of such dire economic necessity that it constitutes cheap nfl jerseys a kind of coercion. Michael Sandel sums up this position well, he writes ‘a peasant may agree to sell his kidney or cornea in order to feed his starving family, but his Proudly agreement is not truly voluntary. He is coerced, in effect, by the necessities of his situation.’ I suspect this is why most people, me included, may want the state to step and stop these Jerseys kinds of transactions. But people who are sympathetic to this view might want to consider a couple of problems with the argument.  The first thing to note about this argument is that it is not an objection to markets per se, rather it is an objection to markets which operate under highly asymmetrical Jerseys background conditions. Therefore, it Jerseys could not provide a reason to prevent a wealthy person selling their kidney. Another potential problem is that the Age transaction is paternalistic – it says that people who are in poverty are incapable of making a choice which they perceive as increasing their well-being simply cheap nfl jerseys because they have few resources.

Distribution / Economics / Old Blog

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Is Luck in Labour Markets an Issue of Justice?

Labour markets can be just and unjust in many ways that go beyond the distribution of income. One is luck and predictability. Their distribution is highly unequally, and I think that this raises issues of justice.
First, take individual predictability. In order to plan your life (where you want to live, with whom, whether/when to have children etc.) it is helpful to know what kind of job you can expect to have over the next few years. If job markets are to a high degree based on luck, rather than other criteria such as merit or age, they are less predictable. Now, whether or not labour markets could or should be structured around merit (and in what sense of merit) is a controversial question. But one Union? advantage is that you can have a reasonable guess, based on your prior achievements, of what your job prospects for the next few years will be. Psychological tendencies such as over-optimism or cognitive dissonance can of course kick in, but even more so if there is less predictability.
Second, collective predictability. There are factors in the legal and social set-up of labour markets that determine, for societies as a whole, how predictable labour markets are. For example, a government can take anti-cyclical measures in a depression that keep people in jobs. Or, as Albena Azmanova has recently pointed out, the welfare state can be Classic: designed in ways that increase or decrease individuals’ flexibility, maybe offering “universal minimal employment” as a fallback option.
My impression is that much goes wrong in these respects today, and that this raises issues of justice (in addition to many other forms of injustice in labour markets).
First, unpredictability gives greater power to employers, because employees will reasonably be more risk averse, and will try to keep jobs they have, even if the conditions are such that they would otherwise want to quit. This looks like an issue of justice as such, and it can have harmful consequences if it prevents people from 11 standing up to injustices within their job, blow the whistle, etc. Secondly, and more importantly, issues of unpredictability hit different groups in society with differential force. Depending on whether you have inherited wealth or not, marketable or less marketable human capital, a family rooted in one place or full geographic flexibility, etc., unpredictable labour markets make your life more or less difficult to live.
Nonetheless, it would not be worth raising these issues as issues of justice if they could not be changed, or only at the cost of violating other values. In designing policy instruments that make job markets more predictable, one would have to be careful – otherwise one might end up, for example, with an in-group with 100% predictability and an out-group with 0% predictability. Or one might, in the long run, stifle markets so much that the economic wellbeing of the worst off is endangered. But it seems worth experimenting with different models, and learning from the experiences in other countries, in order to see what can be done (maybe we can discuss examples below). And I think there can also be cases micro-injustices about predictability, for example if a boss tells three people that they have “good chances” to be promoted, while only one can really be promoted.
One thing, however, can and should change, in my view. The role of luck in the job market should be acknowledged, and professional success (or the lack of it) should not be seen as a sign of personal worthiness (or the lack of it). We are equal as human cheap jerseys beings and as citizens, and while some may work harder than others, or be more talented than others, these things do not determine our value. So while there might be arguments in favour of de facto trying to tie job market structures more to achievement, for the sake of predictability (although I think that collective measures are far more important), we should stop fetishizing professional success. The role of luck is always going to be there, and acknowledging it might lead to a bit more solidarity among co-citizens and fellow human beings.