[DEBATE] : Monks' Cure

Tue Feb 24 14:22:44 GMT 2009

Weekend Edition
January 23 / 25, 2009

The Monks' Cure
Our Current Economic Crisis
By SASAN FAYAZMANESH

An interesting feature of the current economic crisis is the blame
game that is going around. For the most part the crisis is blamed on
certain market practices or participants. In particular, unsupervised
financial innovations and laxness in regulation are seen as the causes
of the troubles that we face. Given this view, the solution offered is
relatively simple: regulate the market and bring financial innovations
under control. However, as I argued in an article in CounterPunch,
this view is simplistic.[1] It ignores the underlying economic system
that produces the practices and participants who are considered to be
responsible for creating the current crisis.

In response to my CounterPunch essay I received numerous emails, far
too many to respond to individually. One inquiry, however, did catch
my eyes. I was asked by a reader what I think about the argument that
short selling was partly responsible for the market crash of 1929 and
current troubles. I was further asked if such practices should be
regulated. I referred the reader to an interesting article that
appeared on Reuters on September 23, 2008, entitled “Short sellers
have been the villain for 400 years.”[2] The author, Daniel Trotta,
argued that when in 1609 the share price of Dutch East India Company
plunged, a merchant was blamed for short selling, and for the first
time the authorities banned such activities.

As I told my reader, whether this was the first time that betting on
the market price was outlawed I am not sure. But as a historian of
economic thought, and as one who has been interested in the market
mechanism in the early stages of development of capitalism, I know
that hedging and gambling in the market place are old practices, at
least as old as the “commercial revolution” or the development of
“merchant capitalism” in the 13th century. Indeed, as I have argued in
my book, Money and Exchange: Folktales and Reality, and in some other
essays, in medieval trade merchants regularly tried to cheat one
another in the market place. [3] In so doing they used other
merchants’ ignorance of arithmetic to swindle them. Arithmetic—which
at the time consisted mostly of knowledge of the Arab numerals, four
basic mathematical operations and the “golden rule,” or the “rule of
three,” where a missing fourth number in two equal ratios is found—had
just reached Europe by way of Arab merchants. Between the 13th and
16th centuries a group of merchants in Europe, particularly in Italy,
wrote manuscripts to teach merchants’ children, who attended special
training schools, the newly received arithmetic. But what is perhaps
most interesting about these manuscripts is that almost all of them
teach how to use arithmetic, particularly in the act of barter, to
cheat their trading opponents and increase what they called the
“overprice.” As such, these medieval manuscripts taught that the rule
of exchange was to come out ahead in transaction and that barter was
“nothing but giving a good for another in order to get more.”

To make a long story short, in the medieval markets arithmetic became
a tool, a “financial innovation” to use the language of the modern
market, to make more money. The rule of the game was to take advantage
of arithmetical ignorance of others to gain as much profit as
possible. This was how capitalism was born. It was born not of
honesty, equality, justice or fairness in exchange, but of deceit,
swindle, inequality, injustice and unfairness.  It was also in this
same period that one can find the emergence of many other financial
innovations, such as forward contracts and bills of exchange,
innovations that tried to increase profit by reducing uncertainty and
risk.

How did the economic thinkers of the medieval era, the Catholic clergy
or the so called Scholastics, react to these market practices? Instead
of trying to reflect on the reality of the new and rising social
system and attempting to understand its true nature, they wrote
pamphlets and gave sermons preaching how to be a good Christian. They
prohibited certain market practices and blamed market participants for
these practices. They warned people of avarice and excessive
accumulation of wealth. They advocated quid pro quo and called for
equality in exchange, an Aristotelian concept that by then had
acquired a Biblical flavour. As opposed to merchants’ concept of
“overprice,” the monks advocated a “just price,” an ambiguous concept
that has been interpreted in a variety of ways, including a price that
covers cost of production plus a “reasonable” profit.  The monks
warned people of practicing such sinful activities as usury and
reminded them of such lines in the Bible: “Lend freely, hoping nothing
thereby.” In sum, the medieval economic thinkers tried to regulate the
market by prohibiting certain practices. Of course, as anyone familiar
with the writings of the Scholastics knows, this prohibition was quite
selective and often did not include the high and the mighty, the
“beloved sons of the church,” who were the church’s benefactors.

It seems that seven hundred years later not much has changed. The
point of departure of modern economics, similar to that of the
medieval economic writings, is not a real economy where deceit,
swindle, inequality, injustice and unfairness are often the norm. But
it is an imaginary world, a peaceful and stable market system where
there is mostly quid pro quo, equality in exchange, “equilibrium” and
“rational agents.” Occasionally, some bad apples, “irrational agents,”
appear on the scene that engage in undesirable practices and disrupt
the tranquillity of the market system. At this point the modern
economists, similar to the medieval monks, start preaching against
these despicable individuals and their practices and call for
regulation. But instead of giving sermons to end usury and avarice,
they lecture against “NINJA loans” (loans made to “No Income, No Job
and No Assets” people), mortgage-backed securities, collateralized
debt obligations, equity default swaps, credit default swaps and tens,
if not hundreds, of other “financial innovations” that have appeared
in the past few decades.

Instead of blaming a few bad Christians and Jews for undesirable
market practices, the modern preachers blame the NINJA people, who
should not have borrowed money; the greedy financial institutions, who
should not have made loans to the NINJAs; the associations and
corporations, such as Fannie Mae and Freddie Mac, which should not
have securitized bad mortgages; the appraisers and the credit rating
agencies, such as Moody’s and Standard & Poor’s, which should not have
rated so highly the value of some financial institutions; the central
bank and its directors, who should not have pushed excessively for
lower short-term interest rates; the government regulators, who should
not have closed their eyes when it came to regulating the financial
intermediaries; the politicians, governmental agencies and
institutions, who should not have pushed for deregulation, etc.

Similar to the medieval economic thinkers, the modern economists also
have relatively simple solutions to solve the ills of the market
system and cure its “excesses.” They propose, among other things,
re-regulating and supervising the financial intermediaries,
controlling the development of “exotic” financial instruments,
renegotiating “toxic” mortgages and “troubled” assets, and prosecuting
the individuals engaged in financial gambling and Ponzi schemes. Of
course, some of these proposals are commendable. After all, who would
be against putting behind bars those greedy tycoons and Ponzi schemers
who caused so much pain? Yet, one should not expect such proposals to
have long-lasting effect on the “undesirable” market practices any
more than the Scholastics’ sermons ended the habits of the medieval
merchants. Many centuries after the monks’ prohibitions, greed,
swindle, usury, excessive accumulation of wealth, charging overprice,
gambling in the market place are alive and thriving.

We should anticipate more of these practices and not less. Even if the
current economic proposals are implemented, we should not expect to
see “toxic” mortgages, “troubled” assets, “exotic” financial
instruments, and Ponzi schemes to disappear from the market for good.
Instead, we should expect every regulation to be followed by
deregulation and, then, the cries for reregulation. We should also
expect the creation of even more “exotic” financial instruments. That
has been, since the age of “commercial revolution,” the pattern of
development of the market system and there is no reason to believe
that such a pattern will change.

Sasan Fayazmanesh is Professor of Economics at
California State University, Fresno. He can be reached at:
sasan.fayazmanesh at gmail.com

Notes

[1] “A Very Short Obit—R.I.P.: the Experts, 1929-2008,” CounterPunch,
November 14 / 16, 2008.

[2] See http://www.reuters.com/article/ousiv/idUSTRE48M9HB20080923.

[3]See Chapter 3, “The Sons of Adam, Justice in Exchange and the
Medieval Economy,’ Money and Exchange: Folktales and Reality (2006,
Routledge).