Guest Post: Sarkozy, Stiglitz & capitalism’s inherent contradictions

By Swedish Lex, an expert and advisor on EU regulatory and political affairs.

The French Commission on the Measurement of Economic Performance and Social Progress presented its final Report written by Stiglitz and other leading economists at an event at la Sorbonne earlier today. The contents of Report is already being discussed widely but at least as relevant are the politics surrounding the Commission’s Report and how France intends to use it to spearhead economic reform at home and abroad. This post provides a few comments on Sarkozy’s speech.

The French Commission was convened by Sarkozy in early 2008 and as regards the timing he said that it could not have been done ahead of the crisis as it then would have resulted in a discussion among academics without consequence. By launching the Commission during the financial crisis and by demonstrating his commitment to the issue, Sarkozy has elevated the matter up to the highest level where, if is rhetoric is to be believed, he intends to keep and promote it further. So, at least in France, the financial crisis is alive and will be used to promote reform. It will be interesting to see how Obama addresses the same issue in his up-coming speech.

The composition of the Commission is in itself revealing as it, besides a large French contingent, contains quite a few U.S. academics. Absent are economists from the ECB and the European Commission as well as from France’s main European partner states, like Germany. The OECD is also well represented. The composition of the group demonstrates Sarkozy’s intention to render the Commission’s conclusion more palatable globally. The Commission’s Report, if one judges by the group that wrote it, cannot be accused of being Franco- or EU-centric.

The French President gave a lengthy speech at la Sorbonne before an auditorium that included la crème of French, European and international academics and policy-makers.

The speech contained the usual French verbal flamboyance that those less familiar with French culture often write off as pure hot air. It is probably however more correct to view the speech as Sarkozy declaring the starting point and the intellectual backdrop for up-coming policy initiatives. The French position on EU financial regulation, accounting rules, climate and trade policies, etc. will be shaped accordingly. It is reasonable to assume that Sarkozy will use the Commission’s Report to re-consolidate his political base well ahead the of next Presidential elections.

Sarkozy related to the fundamental flaws of the current system through a number of examples, for instance by referring to the public having been told that the exponential increase of modern finance was a positive, while it in reality almost threw the world “into chaos”. He went on saying that in recent years, citizens have seen their economic situation deteriorating, despite available statistics and acknowledged measurements indicating positive economic developments. The divide between how citizens experience their situation and how it is presented centrally is destroying democracy, Sarkozy went on to say and said added that people believe that they are being lied to – and they are not entirely wrong to believe so.

Governments need to modify their behavior, first by changing how they account for the situation in society by including questions about the overriding purposes of society and public policy; “our certitudes have evaporated, everything has to be put into question and re-invented”. Current methodologies fail to take externalities into account with the risk of booking developments as progress while, in reality, the opposite is true. Growth has in some regards destroyed more than it has achieved.

Sarkozy made commitments that the French Government will use the Report to begin shaping the post-crisis world by starting at home but also, in parallel, by convincing its European partners to take the lead on the issue and by raising the matter in all international organizations and other fora.

Despite the mainly general in character of the speech, it made clear references to on-going policy battles, for instance as regards mark to market accounting where France is strongly objects to the position of the IASB. According to Sarkozy: “You do not know the value of an asset simply because markets give them a value every second. The opposite is true”.

On “trading”, Sarkozy commented that it is accounted for as creating value under current methodology although it creates a new risk, which in turn may contribute to increased volatility, which in turn necessitates further transactions. Sarkozy put in question the value to society of such activity altogether and added that it creates internal tensions within capitalism – of which he is a supporter – which risks being destroyed as result.

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18 comments

  1. alain maronani

    “The speech contained the usual French verbal flamboyance that those less familiar with French culture often write off as pure hot air”
    I am french living in Montreal for a long time. From Sarko this is only hot air…He likes first and foremost being in a center stage position and nothing else. He is proposing now what it was against 24 months ago when he was touting mortgage for french people the american way….yes ARM and the likes…The french government did nothing to regulate french banks, bigger is better, the last 18 months…The french government is directly (BNP for example) the main shareholder in most financial institution and it could now do whatever it wants….but parading in front on TV and media is always good for Sarko…..

  2. DownSouth

    Thanks for the heads up, Swedish Lex.

    I see where the commission rated a story in this morning’s New York Times:

    http://www.nytimes.com/2009/09/15/business/global/15gdp.html?hpw

    As to the Obama administration, it seems to be so thoroughly subsumed in the growth paradigm as to be beyond hope. The government is the only party willing to buy mortgage debt, currently underwriting 90% of new mortgages, so it is the only thing keeping housing consumption alive:

    http://www.nytimes.com/2009/09/14/business/14big.html?hp

    And the same pattern seems to be true for other parts of the economy. The auto industry, banking and insurance are all on life support. But as the NY Times article points out, it’s government support without any oversight, which seems to be the hallmark of US policy-making for the past few decades.

    Financial innovation, combined with no-questions-asked government support, seems to have brought us to the same place that that same combination in the arts did a couple of decades ago. The humorist Dave Barry, writing back in 1990 regarding the federal government’s funding of “art” projects like the one where LA’s swank cutting-edge elite used federal grants to wrap empty buildings with barbed wire so they could stand around and pat themselves on the back, boasting as to how avant-garde they were, intoned:

    You almost never hear members of the public saying, ‘Hey! Let’s all voluntarily chip in and pay a sculptor $100,00 to fill this park space with what appears to be the rusted remains of a helicopter crash!’…The government supports the arts for the same reason it purchases $400,000 fax machines and keeps dead radioactive beagles in freezers: Nobody else is willing to do it.

  3. DownSouth

    Swedish Lex,

    On a more serious note, I notice that in today’s links there’s some comment on this subject also. pd130 and Uncle Billy Cunctator have posted pertinent links that I haven’t followed up on yet, but certainly intend to do so.

    Daniel Yankelovich in Coming to Public Judgment also devotes several chapters to this subject: “Epistemological Anxiety,” “Defining Objectivism,” “Deconstructing Objectivism,” “Searching for Public Judgment” and “You Can Argue with Einstein.” All together these chapters offer a brief overview of the 20th-century critique of materialism, beginning with Max Weber’s quarrel with instrumental rationality and ending with Jurgen Habermas’ Theory of Communicative Action.

    Yankelovich concludes that: “Unhappily, the objectivist outlook—its dogmatic narrowness, its equation of reality with the measurable and quantifiable, its dedication to specialization and expertise, its contempt for modes of knowing that are not information driven—is still in it virulent phase of ascendancy in the United States, and no amount of philosophical analysis can stop it. But it may be possible to win some minor skirmishes along its extended front.”

    Yankelovich was especially impressed with the work of Habermas:

    Habermas shows that although the objectivist approach may be superior to other modes of knowing for purposes of exercising technical control over nature, it utterly fails to address other human purposes such as the great philosophical questions of how to live, what values to pursue, what meaning to give to life, how to achieve a just and free society, and how to be a full realized and free human being.

    …I say that Habermas has pried open the bars of the (Weber’s) iron cage. Because the tyranny of objectivism insists that there is only one form of genuine knowledge, the claims made by religious truths, the insights of art and literature, the truths of history, the judgments of the public, and the truths of psychological insight and intuitive understanding get lumped together with the claims of astrology, people who see flying saucers with extraterrestrial beings o them, those convince they have knowledge of previous incarnation, and all are held suspect as knowledge claims.

    From the standpoint of objectivism, all of these nonscientific modes of knowing have the status of nonknowledge… This is the imperialist claim that Habermas and so many other twentieth-century philosophers have undermined so thoroughly that sooner or later it will be rooted out of the larger culture, just as it has been (mainly) rooted out of academic philosophy. In its place, a pluralism of modes of knowing is likely to arise as older disciplines in the humanities, philosophy, religion, and ethical conduct…are encouraged to codify and strengthen their own unique address to truth and knowledge.

    I find it instructive that both Yankelovich and Hannah Arendt identified the Vietnam War as a key event that highlighted the shortcomings of modernism. “The objectivist strategy utterly failed to give those responsible for our nations’ policies a proper sense of the issues and how to deal with them,” Yankelovich said. “It more than failed the test of adequacy. It led to distortions and grotesque parodies of rationality, such as the body count and the village pacification program.”

    The current economic crisis has all the same underlying hallmarks as the Vietnam War.

  4. Hugh

    If Sarkozy was serious about economic and financial reform, he would be auditing the big French banks on a mark to market basis. Giving a speech means nothing. Everyone, including Obama today, is giving a speech. Speeches do not substitute for action. If Sarkozy wants to talk the talk, he should also walk the walk.

    As for Stiglitz, I am getting rather tired of his floating serenely above the fray. He could be serving a much more useful function if he engaged the policies of Geithner, Summers, and Bernanke directly in this country.

  5. DownSouth

    (continued)

    Even though the current bunch (Geithner, Bernanke, Summers) is fighting a different war than the McNamara gang, the similarities between the two could not be any more striking, as Arendt’s description of the McNamara gang illustrates:

    Insofar as they have the appetite for action and are also in love with theories, they will hardly have the natural scientist’s patience to wait until theories and hypothetical explanations are verified or denied by facts. Instead, they will be tempted to fit their reality—which, after all, was man-made to begin with and thus could have been otherwise—into their theory, thereby mentally getting rid of its disconnecting contingency.

    Arendt’s admonition to not forget history (which today would include the events of the Vietnam War) is also apropos:

    Because of the extravagant lengths to which the commitment to nontruthfulness in politics went on at the highest level of government, and because of the concomitant extent to which lying was permitted to proliferate throughout the ranks of all governmental services, military and civilian—the phony body counts of the “search-and-destroy” missions, the doctored after-damage reports of the air force, the “progress” reports to Washington from the field written by subordinates who knew that their performance would be evaluated by their own reports—one is easily tempted to forget the background of past history, itself not exactly a story of immaculate virtue, against which this newest episode must be seen and judged.
    –Hannah Arendt, Crises of the Republic

  6. DoctoRx

    The last paragraph on trading is right on. The major purpose of trading so many things is to generate income for the financial community. These costs accrue to society.

    Perhaps they should close the stock market for random lengths of time at random intervals. Then we will see what “investors” really value these companies at.

    And go back to long-term fixed-price contracts for oil.

    How much would oil prices drop, by removing the traders’ vigorish, if a barrel of oil did not change hands something like 27 times before reaching the consumer?

    And etc.

  7. Roberto

    Kudos M. Sarkozy! A LOT better than Obama on the real situation in finance. Sarkozy perceives accurately that mistrust of government has been well-deserved due to its misrepresentations and fudging (“regulatory capture,” according to Mr. Buiter).

  8. Swedish Lex

    @ DownSouth,

    Thanks for your insights. Do you know if Arendt wrote extensively on the EU (or EEC as it was back then). Much appreciated.

    1. DownSouth

      Swedish Lex,

      I don’t recall ever reading anything Arendt wrote on the EU.

      Her big thing was that vitalist construct called “freedom,” so she was far more interested in the Soviet Union and eastern Europe’s struggle for freedom, especially the Hungarian revolution of 1956.

  9. billythemountain

    @ DownSouth- having studied architecture and having to read and listen to a great many lectures on ‘modes-of-knowing’, phenomenology, deconstruction, etc. the problem that I have with your– can I use the word analysis?– of modernism is that, firstly, modernism isn’t as monolithic as it’s critics would have you believe– Do you really believe that the nexus of American politics and the management of the Vietnam War is a good example of modernism? And is it valid to use the Vietnam War as a metaphor for modern ‘financial innovation’ (irrational debt-equity ratios and incomprehensible derivative products, etc.)? Secondly, the alternatives really are not that good? Religion? Irrationality? It’s easy to attack rational thinking in relation to questions like, What is the meaning of life? But equally, you are also forced to admit that the alternatives don’t help you much either. I think it’s a long hard slog and the sooner ‘we’ knucke down and start solving some of the issues such as climate change, global finance, global equality, etc. the better! That might mean not letting ourselves be so easily distracted by consumer goods…

  10. Toby

    @ DownSouth and billythemountain: interesting stuff… important too.

    I’m with billy in that the alternative to rationality tends to be irrationality. To achive consensus, which is a prerequisite for moving in some direction towards some goal, some sort of recourse to data is very helpful. On the other hand, the irrational seems to be very operative amongst “rational” policy makers, who are not exactly apolitical and scientific in their methodologies.

    For me, the problem is the system’s tendency to allow humans of a certain ambitious/ruthless temperament to rise to the top, humans not likely to see the efficacy of a fully open-minded approach to problem solving, especially if such diminishes their power, their raison d’etre.

    So perhaps labels such as modernism are unhelpful. There are important parallels between the Vietnam War and the current financial crisis that are worth pointing out, regardless of labels, namely that the super-rational are irrational in the pushing through to “completion” of their theories, and how their theories impact on the world. At the same time, the best way to deal with such philosophical questions as “what is the meaning of life?” is as rationally as humanly possible, while allowing poetry its sway. And everything, of course, with a large dose of humility!

    1. DownSouth

      Toby,

      I downloaded Sen’s essay (the one that pd130 linked to over in today’s “Links”) and there is one thing he said that for me pretty well sums it all up: “The purely economic man is indeed close to being a social moron.”

      Here Sen is talking about that “economic man,” that rational and broadly self-interested actor who forms the heart of classical and neo-classical economic theory.
      http://en.wikipedia.org/wiki/Homo_economicus

      As Sen explains:

      A person is given one preference ordering, and as and when the need arises this is supposed to reflect his interests, represent his welfare, summarize his idea of what should be done, and describe his actual choices and behavior. Can one preference ordering do all these things? A person thus described may be “rational” in the limited sense of revealing no inconsistencies in his choice behavior, but if he has no use for these distinctions between quite different concepts, he must be a bit of a fool.

      It was Jonathan Swift, however, who gave us the most indelible portrayal of what this “social moron” might look like. George Orwell, writing in “Politics vs. Literature,” gives a synopsis:

      …it is not because they oppress the Yahoos that the Houyhnhnms are unattractive. They are unattractive because the “Reason” by which they are governed is really a desire for death. They are exempt from love, friendship, curiosity, fear, sorrow and—except in their feelings towards the Yahoos, who occupy rather the same place in their community as the Jews in Nazi Germany—anger and hatred. “They have no Fondness for their Colts or Foles, but the Care they take, in educating them, proceeds entirely from the Dictates of Reason.” They lay store by “Friendship” and “Benevolence,” but “these are not confined to particular Objects, but universal to the whole Race.” They also value conversation, but in their conversations there are no differences of opinion, and “nothing passed but what was useful, expressed in the fewest and most significant Words.” They practice strict birth control, each couple producing two offspring and thereafter abstaining from sexual intercourse. Their marriages are arranged for them by their elders, on eugenic principles, and their language contains no word for “love,” in the sexual sense. When somebody dies they carry on exactly as before, without feeling any grief. It will be seen that their aim is to be as like a corpse as is possible while retaining physical life.

      Swift “believes that the scientist’s place, if he has a place, is in the laboratory,” Orwell concludes.

  11. billythemountain

    This kind of reminds of Nietzsche’s dionysian and the apollonian– so, an important philosophical question might be: what’s love worth? But perhaps a more revolutionary question, wtr. to the more recent past (ie. 60s and 70s) is how much is a life worth? For how much money are you prepared to work all day doing something which you don’t see the point of (or agree with) and which you don’t enjoy? Is this a rational question or an irrational question?

    Is someone like Dick Fuld rational? Is this a category, which we can even apply to people? How rational is something like Game Theory? How rational are symbols? Aren’t symbols just arbitrary? I mean, there’s a certain point where you begin to think that ‘rationalism’ is just polemical. After all, this is a word that’s been kicked around so much; But maybe rational just means reasonable– a bit like common sense (but increasingly without the common.) Is Dick Fuld reasonable? No. But either is cutting off your ear to prove that you love someone.

    1. DownSouth

      billythemountain,

      That’s absolutely right. Modern vitalism and romanticism have their antecedents in the earlier Dionysian religion, in Heraclitus’ conception of ultimate reality as Flux and Fire and more particularly in the development of the Dionysian theme in Greek tragedy. “[L]ife is at war with itself, according to Greek tragedy,” Reinhold Niebuhr tells us. “There is no solution, or only a tragic solution for the conflict between the vitalities of life and the principle of measure.”

      That’s why a couple of the items from the Commission Report (see Swedish Lex’s link above), where it speaks of “subjective measures,” are really quite neoteric:

      33) The Commission believes that in addition to objective indicators of well-being, subjective measures of the quality-of-life should be considered.

      Recommendation 10: Measures of both objective and subjective well-being provide key information about people’s quality of life. Statistical offices should incorporate questions to capture people’s life evaluations, hedonic experiences and priorities in their own survey.

      34) Research has shown that it is possible to collect meaningful and reliable data on subjective as well as objective well-being. Subjective well-being encompasses different aspects (cognitive evaluations of one’s life, happiness, satisfaction, positive emotions such as joy and pride, and negative emotions such as pain and worry): each of them should be measured separately to derive a more comprehensive appreciation of people’s lives.

      Measuring “objective indicators” is of course possible. But “subjective measures”? If Arendt and Yankelovich are to be believed, this is an arena where public action, wisdom, common sense and good judgment would be more useful than trying to cram the vitalities of life into the “expert’s iron cage” of instrumental rationality and scientific objectivism.

      To give some idea just what they are up against, consider the difficulty of defining happiness. “Happiness is notoriously difficult to describe,” George Orwell once said, “and pictures of a just and well-ordered society are seldom either attractive or convincing.”

      This has been true throughout the ages. “For painters and writers, heaven as a subject proved almost a total loss,” Timothy Foote writes in The World of Bruegel . “Near the blue vault the air grows thin; the presumptuous creative imagination fails. A sense of sacrilege sets in, and the artist, especially the devout artist, is likely to have difficulty with the job of description, as even Dante did in the third book of the Divine Comedy , where he rambles on about eternal harmony and light. But hell and the devil have always been more rewarding subjects.”

      And so it is, happiness only seems to exist in juxtaposition to unhappiness. Heaven exists only relative to hell.

      Orwell put it this way:

      It would seem that human beings are not able to describe, nor perhaps to imagine, happiness except in terms of contrast. That is why the conception of Heaven or Utopia varies from age to age. In pre-industrial society Heaven was described as a place of endless rest, and as being paved with gold, because the experience of the average human being was overwork and poverty. The houris of the Moslem Paradise reflected a polygamous society where most of the women disappeared into the harems of the rich. But these pictures of “eternal bliss” always failed because as soon as the bliss became eternal (eternity being thought of as endless time), the contrast ceased to operate.

      For the last couple of hundred years we’ve defined progress and happiness in terms of growth–“more and more, bigger and bigger,” as Arendt put it. Obviously this cannot go on forever. But I think you can see the difficulty the Commission faces in trying to come up with a better concept of better, a better better you might say. Will the tools of instrumental rationality and scientific objectivism suffice to do this?

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