Why ignorance, not greed, caused the GFC

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Recently Cathnews featured an article by Ian Harper, 'Morality and the GFC' (or 'global financial crisis' to the rest of us). Harper has impeccable economic credentials, being an emeritus professor of Melbourne University and a director of Access Economics, 'Australia's premier economic consulting firm', according to their web site.

The thrust of the article was to remind its readers that the discipline of economics had its foundations in moral philosophy, and to argue that the core of the failings that led to the GFC were moral failings. The problem lay in the relentless pursuit of 'self-gratification, through money, power and fame'.

Significantly the problems of greed and selfishness are not just to be found in the excesses of the financial cowboys who brought our system to its knees, but also in each and every one of us who has made financial decisions based on quicker and higher levels of return on our investments.

This focus on greed and selfishness is not unique. Harper points to three articles by Kevin Rudd on the topic, and cites other economists who have reasoned similarly, while Andrew Hamilton has argued that 'The root of the financial crisis was greed — seeking individual financial gain in ways that did not respect the common good'.

In the face of such consensus it may be important to hear a dissenting voice, a voice which points us in a different direction. I will return to that dissenting voice in a little while, but first I would like to focus on Harper's comments on the present state of the discipline of economics:

'Economics has a very primitive understanding of the world at this point in its development. Economists have achieved the level of practical sophistication displayed by medical practitioners in the days when their standard prescription, no matter what the aliment, was to let blood.'

Again it is worth keeping in mind that Harper is not some left-wing radical seeking to attack the profession of economics, but someone well-respected and employed to offer economic advice and comment on policy.

This self-assessment of the discipline raises two important questions. Given of course a certain amount of hyperbole in Harper's account of the state of economics, what is the morality of Access Economics, or any other similar body, offering economic advise to anyone, if by his own admission their standard prescription amounts to little more than 'letting blood'? It is one thing to offer advice not knowing that it will not be very helpful, another thing altogether if one is aware how limited the value of that advice is.

However, for this present case of the causes of the CFG, there is a more important question to address. If indeed economics has 'a very primitive understanding of the world' at this stage of its development, how can we be sure that the very ignorance of the discipline itself has not contributed to the problems we face? In simple terms, are we just bad, or are we ignorant?

This is not to say people have not been greedy and that greed has not contributed mightily to our current crisis. But if in fact we do not really understand how a capital-based economy works, then we cannot be fully blamed for making bad decisions. Worse if in fact some pretend to understand, but really don't, then with the best will in the world, we may be doing the wrong thing, thinking we are doing the right thing in following their advice.

This scenario was spelt out around 60 years ago in the economic writings of Bernard Lonergan SJ. Most people who have heard of Lonergan know him from his philosophical and theological writings. Less known are his two economic manuscripts now published in his Collected Works written in the wake of the Great Depression.

Remarkably Lonergan developed his own macroeconomic model with which he developed an analysis of the cycles of an economy, seeking to find a way out of the cycles of boom and bust which continue to plague us.

While it is hardly possible to spell out even the basics of his model in such a short piece, his conclusion remains pertinent to our present situation. The reason for an economic bust is 'not the reason on which simple-minded moralists insist. They blame greed. But the prime cause is ignorance.'

In this regard Lonergan stands in the Catholic natural law tradition. Moral precepts can only flow from current understanding of the reality involved. If one does not understand the reality involved, even with the best will in the world moral guidance will be misplaced.

But correct understanding of economic processes is not easy, and can only be the product of a long and arduous investigation. After centuries of effort a seasoned practitioner such as Harper still compares it with the medical procedure of bloodletting.

In this regard Lonergan was particularly critical of Catholic Social Teaching on the economy for its lack of technical understanding. As he often asked, 'Where were the Christian counter-parts of the 'crazy old man' Karl Marx, sitting in the British Museum voraciously reading and relentlessly studying about political economy?'

Where indeed!


 

Neil OrmerodNeil Ormerod is Professor of Theology at Australian Catholic University. He currently is part of a research project into Lonergan's economics and its contribution to understanding the global economic crisis, funded by the Metanexus Institute.

Topic tags: Neil Ormerod, GFC, Catholic natural law, Bernard Lonergan SJ, Karl Marx

 

 

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Existing comments

here is the lastest nonsense or sense pertaining to that arcane science which no one can explain. I quite like the analogy of bloodletting.
JD Salinger | 21 October 2009


It was an economic fraud that began our current system of credit. Now, even a university degree cannot uncover it, much like the library of amendments to the ten commandments.
ken mckay | 21 October 2009


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