Ask Why

If you never saw (or read) “Enron: The Smartest Guys in The Room”, you should check it out.
As of this writing it is posted on youtube — albeit lo-res, parsed into 11 segments and featuring Spanish subtitles (which I kind of enjoy…)

Since you may not have the time to watch the whole thing, I’ll go ahead and embed the last segment:

The energy firm’s spectacular failure, propped up as it had been by elaborate (and borderline hilarious) financial deception and boundless corporate greed, is looking pretty familiar these days. I bet the government reaction to the Enron crisis — essentially to frown but do nothing of consequence — will recur this time around. Why? Why do people invest in the first place?

Well inflation is pretty much always on the rise, so your money is always worth less than it was the last time you looked. So you must invest in something or you’ll be losing money. Since you have to invest, but you don’t necessarily want to be a captain of industry yourself, you might as well put your finger in corporate stocks, bonds, market indexes, funds, etc. This is because corporations, and the financial instruments that exist on their behalf, represent large amounts of capital by way of lots of different stockholders who are not liable to know or care where that money comes from. So you minimize risk *and* responsibility! You get easy money (or at least you beat inflation) and corporations get the equity they need. It’s win-win! Investors in and executives at Enron were just doing what the system was designed for them to do!

But why is inflation always on the rise? Why is the global economy always growing? Why is there no limit to its growth? Why does the drive for profit trump every other value? Why can’t we just industrialize the whole world, produce and sell more and more stuff? Why can’t we make money forever? Why can’t every generation be richer than the last, with an endless bounty of natural resources and happy, faceless laborers?


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4 Responses to “Ask Why”

  1. SH Says:

    Great analysis. To answer all of those questions: capitalism.


  2. William Bruntrager Says:

    I know I’m susceptible to tu quoque on this, especially in my latest posts, but the man you are attacking seems to be made of straw. The profit motive trumps all else? Come on, who says that?

    Also, you’re going to have to do better than that on your description of how investments work. Inflation is an insidious device manufactured by corporations to make sure they get they equity they need? That’s actually an interesting claim, and worth defending if it’s true. But it doesn’t stand on its own (just for example, if all you cared about was beating inflation, you could invest in what are called Treasury Inflation-Protected Securities, or TIPS).

    You use a pretty broad brush here in your indictment of capitalism. I think you’ll be better off arguing explicitly that specific pursuits of private profit are a net harm to society, rather than saying “it’s all rigged!” To borrow from my own framework which I posted on earlier today, higher interest rates on investment are supposed to indicate better uses of capital. Why, when, and where is this untrue?

  3. tripinchina Says:

    I’m trying to learn the basics of finance these days…so you’ll have to bear with me.

    It should come as no surprise to you that I agree with SH’s answer to my questions — capitalism is the culprit.

    Chomsky has said “capitalism is a system whereby the more money you have, the more money you can get” The corollary, readily observable in the world since the industrial revolution, is that the economies within this system must grow. Meanwhile, the primary function of the state is to bolster that growth, since it brings them political clout and military prowess. To this end it seems pretty efficient to maintain a class hierarchy and (ever since Marx) we can observe the state doing just this using the various methods at its disposal: international trade agreements, propaganda/education, finance, etc.

    Inflation is another corollary — as capital expands, value is dispersed per unit of currency and your money is gradually worth less. I’m not saying that interest is the brainchild of corporations — rather to me it looks like a systematic phenomenon. That is, it looks like it’s a reaction to *and* a cause of economic growth.

    As you point out in your (hilarious!) “guide to investment,” higher interest rates on investment indicate higher risk. Sure! But I don’t know how that correlates to “better” or “worse” use of capital? Is the best use of capital simply to generate more capital? Are there no other considerations (social, moral, ecological) to be taken into account here?

    You say (or rather, economic theory presupposes) the following: individual self-interested (and private-propertied) actors use the market to bolster their own interests — capitalism came about as an expression of this natural profit motive that people have. I say the market is an institution propped up by and irrevocably mixed up in state goals, which tend to be very aggressive, short-sighted, and domineering.

    Here’s an example: In the 17th and 18th centuries, the East India Company was a great investment! One of the world’s first corporations, it was able (thanks to British colonial designs in India) to corner the textile market for Britain and fuel the expansion of His Majesty’s Empire. We all know the unpleasant consequences that this had for indigenous societies the world over — but we would be fools not to invest!

    I can’t tell you whether British colonialism and industry were a net harm to society — in fact, this whole idea of trying to measure objective units of harm/happiness is a pretty sorry endeavor. You’ll always be leaving someone’s happiness out of your calculation — especially the happiness of the next generations.

  4. William Bruntrager Says:

    Nice reply. You should put up a post on the East India Company.

    Assuming for the moment that investing in the East India Company would have produced a good return (and I have no reason to believe it wouldn’t have), I’d say the problem was the ability of some groups to exclude others from the capitalist system via force. It seems to me that as long as you are an indigenous people, you are sitting ducks for predatory capitalists. My solution would be to get into the market, but that’s obviously not sooo great because you have to give up your unique culture.

    I think it’s worth elaborating your thoughts in a separate post on what you see as the consequences or alternatives to accepting return on investment as a decisive indicator of “usefulness to society.”

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