Friday, June 12, 2009

The economic crisis and the ethics of capitalism

In recent times, Ethics has become a new paradigm which extends from trade to finance and business. Yet capitalism is in troubled waters; 'love of money' has led to extreme situations: high wages for the rich, huge financial profits, intollerable poverty, extreme inequality in income, environmental degradation,... The resurgence of Ethics seems to be a reaction to the moral and social consequences of a world dominated by an endless search for wealth.

Keynes expressed his views in his famous essay 'Economic Possibilities for our Grandchildren'(1930): "All kinds of social customs and economic practices, affecting the distribution of wealth and economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they maybe in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last to discard". He also wrote: 'When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals".

There can't be any dissociation between Economics and Ethics - which goes back at least to Aristotle in Nichomachean Ethics, where he related economics to human ends. Adam Smith's theory, - he was a professor of Moral Philosophy at the university of Glasgow- , was wrongly assimilated to pure free market. We owe to Amartya Sen* his critique of mainstream economics on ethical grounds. The self-interest view based on rational behaviour involves a rejection of ethics and leads to very abstract theoretical models on the functioning of the economy.

Capitalism is not a timeless system; it is a historical form of economic organisation which is not based on self-regulating markets, but embedded in the fabric of society (K.Polanyi). Its future is not written in marble.

The absence of ethical motivations in economic behaviours might be considered a fundamental cause of the global crisis. The development of financial markets as a product of the deregulation of the 80s has led to excessive risk taking and speculation which has turned to be detrimental to 'real' employment and economic activity. Nobody has ever asked whether hedge funds had any ethical purpose. This was not the issue.

The scandal of widespread poverty, even in richer countries, is another feature of unregulated capitalism. Inequality has become unbearable in our democratic societies, but this is hardly a topic for public debate.

To restore sound economic conditions , we need a radical break with the past system which is responsible for the meltdown in which we are all now. Stronger regulation and supervision in financial markets are needed along with more effective redistributive policies to protect the most vulnerable categories of the population.

Our citizens ask for full employment and more equity in income distribution, the two aspects that Keynes has strongly emphasised in his General Theory. It's time now to act, not just words or good intentions.

* Amartya Sen, Rational Fools: A Critique of the Behavioral Foundations of Economic
Theory in Philosophy and Public Affairs, Vol. 6, No. 4 (Summer, 1977), 317-344.

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