THE FINANCIAL AND ECONOMIC CRISIS AS A NORMATIVE ORIENTATION CRISIS
TOWARD A CONSTITUTION OF CAPITALISM:
LEARNING FROM THE CRISIS
By Peter Ulrich
[This article presented May 16, 2009 in Basel is translated from the German on the Internet, http://www.ratkontrapunkt.ch/fileadmin/Redaktion/Dossier2009/3_2_Orientierungskrise_PUlrich.pdf.
Peter Ulrich is an emeritus professor of economic and business ethics at the University of St. Gallen, Switzerland.]
With the current nameless financial and economic crisis, several past assumptions and risk models of economic life have been shaken more than ever in the postwar era. On the day before his 80th birthday, May 1, 2009 and only a few weeks before his death, Ralf Dahrendorf wrote a full-page essay in: “Tages-Anzeiger” under the title “The Fatal Step to Credit Capitalism”:
“It began as a financial crisis, then grew into an economic crisis and since then is seen by many as a far-reaching social and perhaps political turning-point […]. The thesis defended here is that we have experienced a profound change of mentality and that again a change is imminent now in reaction to the crisis.”
Dahrendorf saw the core of events in “mentalities” and “dominant attitudes on the economy and society,” not in the much invoked systemic causes. What is central is setting them in their cultural and social context and understanding them from this context, not relativizing the role of systemic factors. Three interlocked problem planes should be distinguished: mentality, system-controls and societal organization. Economic ethicists are not especially competent for questions of systemic financial market controls – perhaps better capital-holding requirements, higher transparency standards, more effective financial market monitoring and licenses for financial products, better corporate governance, independent rating agencies and so forth. They are, however, competent for mental and social context questions. In the following the focus will be on these context questions. I will sketch a possible orientation perspective in four steps.
Let us begin with the keyword “mentalities.” Suddenly nearly everyone deplores the symptoms of a morally unrestrained economic doctrine:
• The greed of investors for maximum return on equity acted like a “mania” or mental coercion and became the driver of a business- and economic policy of “practical constraints” or “we-have-no-choice”;
• The shareholder value doctrine on whose line dubious corporate governance standards of good business were established that turned out to be an essential cause of bad business conduct of large stock corporations in the current crisis;
• Business models of financial management that can only be described with the “greater fool theory” of the market: veiling, guaranteeing and scattering risks – whoever buys is responsible;
• Disintegration phenomena in the self-image of “responsible actors” of the economy who often lost any sense for the fine distinction between “honestly earning money” and “money earned honestly”.
Why did the business conduct of so many actors go wild? The wisdom of colloquial language is helpful. The “boundary” is obviously lacking, the sense for healthy limits of a one-dimensional thinking fixed on maximizing advantages and profits. And the “bond” is lacking, the integration of inherent economic necessities in interpersonal obligations (of decency, responsibility, solidarity and justice).
CHALLENGE: “CHANGING THE MEANING OF PROGRESS”
An individualization of the problem of “boundary” and “bond” often assumed by ethicists is not my intention. Many people associate ethics only with individual ethics and hardly ever institutional ethics. From an economic ethics perspective, this is not a viable alternative. The interaction between individual attitudes (personal ethos) and institutional frameworks (incentives and restrictions) is important. Ethically-oriented responsible conduct must be executed individually on the basis of a corresponding consciousness and must also be reasonable within the institutional pressures for individual self-assertion.
Therefore the German ordo-liberals who originally called themselves “neo-liberals” stressed the role of the market boundary. Alexander Ruestow (1961) emphasized:
“…that the boundary of the market, the market framework, is the true human domain and is a hundred times more important than the market itself. The market itself has only a serving function. (…) The market is a means to an end, not an end-in-itself…”
This “market boundary” represents the “joint” between the free enterprise system and the social life world. The real challenges of time lie increasingly there today. Therefore this is not just a systemic crisis. Crucial questions concern cultural and social presuppositions or orientation horizons of economies, not the “inherent logic” and functioning of the free enterprise system. One thinks of the trust in economic leaders and even between them (especially in the financial branch) that is understandably lost. Or one thinks of the constantly growing gap and the pressing question for whom and for what the system should function efficiently. These questions cannot be answered “purely” economically. Economics is not an end-in-itself but the means to the good life and human coexistence. Rational economics includes and does not exclude meaning and justice. Thus economic rationality as usually understood is not the entirety of economic reason. That is the systematic reason why economic ethics is sought increasingly today.
In answering questions that can only be analyzed rationally in economic ethics categories, premises are revealed on the relation of citizen, market and state and the necessity for system regulation. A better „management of speculation bubbles“ on the financial markets is an example. No technocratic systems engineering is enough because the main problems concern the normative premises and criteria of a „good“ or „better“ functioning economy. Therefore the project of economic ethics is very controversial.
My first core thesis is that we witness an extensive orientation crisis with the unclear relation between the market economy and the society in which we want to live at its center. We do not only experience a crisis of the economic system with maximizing advantage and profit. The progress horizon of our economic and social development has lost its unquestionability and its ideological innocence, not only the means and methods.
Ralf Dahrendorf (1980) can be quoted again here. Almost thirty years ago he wrote in his book “The New Freedom” (Die Neue Freiheit):
“History advances by changing the theme… One day people will wake up and notice what was important yesterday, what occupied and tore them apart, does not have the same significance any more. We rub our eyes and discover we cannot solve the problem that kept us up last night by doing more or doing something better. We must turn to another problem…”
A foundational reflection, an unbiased meditation about the normative and axiomatic presuppositions and limits of customary thought-models is crucial in times of “changing historical themes.” This is even harder in academics than in life. As the philosopher of science Thomas S. Kuhn showed, “normal science” puts its “paradigm” in question while defending its central thought-model in a self-referential way. The paradigm no longer equal to the change of the progress theme was first only questioned by outsiders. Outsiders – for example economic ethicists – are people who see things reversed. They identify what was previously considered the solution of almost all problems as part of the problem. Since Einstein’s famous saying, we know a problem cannot be solved with the same thought-models that caused the problem. Let us ask, therefore: What is the core of the problem in changing the theme of progress?
CONTEXT: THE “GREAT TRANSFORMATION” (IN PRAXIS AND THEORY)
Under the term “The Great Transformation,” the economic historian Karl Polanyi offered a perspective on historical modernization with the dynamic of the economic system’s progressive detachment from society at its center. According to Polanyi (1944), “society at the end is treated as an appendage of the market. The economy is no longer embedded in social relations. Social relations are embedded in the economic system.”
The confusion of means and ends occurs institutionally. Like a practical constraint, the economic system’s self-dynamic would take its course as with Goethe’s sorcerer’s apprentice. With the unfettered globalization of markets, we were eyewitnesses to an epochal political realization of this transformation. Whoever dared to ask about the normative presuppositions of a useful globalization policy was branded a “globalization enemy.” To the believer of the creed “more market is always good,” a globalization without prerequisites and limits appeared as the solution to nearly all problems and not as a problem itself. (Einstein sends his regards.)
In present experience, the globalization debate of the last 20 years was and is joined with highly emotional worldview positions. Polanyi’s thesis of the economic system becoming progressively „disembedded“ and dominant is plausible but points to a fundamental misunderstanding from the perspective of an integrative economic ethic (Ulrich 2008). This is the theme of my second core thesis: There is no “free” enterprise system which is free of ethical and political prerequisites.
Every development of the market economy is inevitably embedded in a bed of economic ethics and political philosophy bound to certain implicit or explicit normative key ideas on good social cooperation of individuals. The most radical conception of a deregulated and de-politicized market economy is still based on a certain economic ethos and institutionalized in constitutional law, which is enforced politically – far from laissez-faire ideas of a self-organizing market. In this sense the primacy of ethics and politics before the market is valid purely logically for all political conceptions of market regulation.
Thus, the core of our problem shifts from the empirical surface to the normative background convictions! If the politico-ethical “bed of ideas” allows a “free” market economy to become independent theoretically and practically, this ideas must be illumined on the level of contemporary practical philosophy to make them accessible to ethical and political modernization. Mind you, this is not a request directed against an efficient free enterprise system but one of an ethically rational progress orientation for this system.
Unlike today‘s “pure” neoclassical economists, the classical authors of Political Economy were fully aware of this order of things. Especially Adam Smith and John Stuart Mill were both brilliant moral philosophers. They started from the Aristotelian triad of ethics, politics and economics in this explanatory sequence. Meanwhile this lost order of things gains new actuality because of the problem pressure. This is beginning to get through to the Frankfurter Allgemeiner Zeitung e.g. It recently asked in view of the current financial- and economic crisis:
“Where is the well-founded criticism of the Political Economy whose textbooks are still screenplays of the present crisis?”.
For decades the opinion-making FAZ almost hermetically excluded this new question. Why is this? The point is the “bed of ideas.” In the depth structures of the neoclassical-economic worldview, ideological “drivers” gave the motivational push to the vast breaking down of moral inhibitions and institutional deregulation of the free enterprise system in practice and theory. Let us illumine the not completely “pure” economic practical- or system-logic.
DEPTH STRUCTURES: THE METAPHYSICS OF THE MARKET
The early neoclassical authors from the 1870s reflected the real Great Transformation. In its time, that was a good descriptive theory: the resulting “pure economics” modeled the increasing independence of free enterprise toward an ideal type. It did not want to be part of moral philosophy any longer as with classical authors and their political economy. Since then, the economic approach has not thought through the ethical and political presuppositions of its axiomatic. Instead the solution of the core politico-economic problem, which is the problem of a legitimate and fair balance of social interests, is only possible as the immediate consequence of “pure” free enterprise system logic. Thereby the efficiency of this system is already overstrained in the theoretical approach.
The general balance theory represented the theoretical peak of this effort. The old liberal Laissez-faire creed of the 19th century was its practical message. However the neoclassical balance theory represents more a mathematical metaphysics of the market rooted in Christian theology of creation reflections than a “social physics” as Joseph Schumpeter thought. It celebrates a conflict-free economy completely removed from ethical-political bonds. In this ideal world, there are only winners, not losers. Not accidentally the 1855 French textbook of the economist (not theologian!) Frederic Bastiat widely read in the 19th century titled “Harmonies économiques” refers explicitly to the “harmony of the divine law governing human society.” The normative message of such “social physics” as a foundation of market liberalism is not hard to understand. It marvelously suited the early middle class interests and legitimation needs of the time. As Max Weber showed in his famous study “Protestant Ethic and the Spirit of Capitalism” (1904) more than a hundred years ago, this spirit rose out of the “most inward forms of Christian piety” that penetrated all life in Zwingli’s and Calvin’s radical Protestantism – starting from the financial metropolises Zurich and Geneva.
Fortunately the universities were not affected because they are, at least in principle, no communities of belief but enlightened places of disciplined methodical thinking. So we might expect that modern economics gives unreserved reason-guided criticism to the old metaphysic of the “free” market. But this is not really the case. Therefore the task of an ethically critical opening of the economic thought-model dominant in theory and practice presses.
ENLIGHTENMENT AS CRITICISM OF ECONOMIC REASON
A thorough criticism of the (not entirely) “pure” economic rationality (or “inherent logic” of the market system) regarding its normative background assumptions is at the heart of this project. I cannot completely explain here this first systematic step of integrative orientation (see Ulrich 2008, pp. 111ff). The economic squaring of the circle, namely reduction of society to the market economy, must be prevented. In the neoclassical and neoliberal axiomatic, all social interaction is seen as a mutual exchange of advantage between "Homines oeconomici" that seek to maximize their private benefits and are mutually indifferent as persons. If the economic agents voluntarily sign exchange-agreements, this is regarded as proof for a win-win situation: both sides profit. The coordinating principle “market” seems to be (exchange-) just and the guaranteeing authority of individual freedom, not only (Pareto-) efficient. Where is the problem here?
As the short answer of economic ethics, the problem is that the normative logic of mutual advantage is not identical with the normative logic of interpersonal relations. In other words, the market-principle cannot replace the moral principle understood as ethical reason. In a formal way overarching cultures, this humanistic principle defines the basically ethical ideas that all people should respect and acknowledge one another unconditionally or categorically, formulated with Kant’s imperative – as persons of equal dignity with the same basic rights. A civilized society and world community cannot ignore this. Otherwise the barbarism of distinguishing people according to criteria like ethnic descent, religion, world view, social status and so forth quickly threatens. Recognizing all members of society as citizens with equal rights is the prerequisite for people being able to live and think differently as they want. This requires an impartial public order neutral to the different private life projects of citizens enforced in constitutional law as the condition of a multicolored social pluralism of life forms and worldviews. This two-stage structural reality is the key criterion of political liberalism according to John Rawls.
From this politico-philosophical perspective, the economic liberalism according to the market model is not a sufficient principle of a liberal society because individuals in the “free” market always only conditionally agree with one another – according to their private advantage calculation. The basic principle of ethical reason, the principle of the unconditional mutual acknowledgment of individuals in their inviolable dignity as human subjects and in their status as free citizens with equal rights, is not fulfilled. And as long as the social or international starting position is unfair, the result of exchange or trade in an efficient market can never be just. This structural partiality of the free enterprise “system rationality” does not satisfy the political-liberal criteria of an unbiased neutral basic order.
For this reason, the political – or more exactly – republican liberalism (Ulrich 2008, pp. 276ff) is focused on a well-ordered society of really free citizens and cannot be reduced to the concept of the “free market” and the corresponding economic liberalism. In other words, a “civilized” market economy is something different than a deregulated market society. In its core, it must be understood as a constitutional state solidarity connection of free citizens. Not welfare criteria but constitutive rights and obligations of all citizens account for the primary orientation of a “civilized” market economy in the context of a well-ordered society of free and equal citizens.
PROGRESS HORIZON: “CIVILIZING” THE MARKET ECONOMY
We must learn to clearly distinguish between economy and society – in the sense of the ancient Aristotelian triad of ethics, politics, and economics – and to ensure the priority of a society in which we want to live over the “system rationality” of market economy. Starting points are necessary for “civilizing” the market economy and its embedding in modern civil society. The contemporary clarification of the model of a fully developed and well-ordered civil society and the legitimate and meaningful role of the market economy in it is vital.
Two civilizing starting-points are offered: firstly education and cultivation of the indispensable civic virtue as a personal prerequisite; and secondly the basic constitutional order – the further development of civic rights that constitute the real status of free citizens also in “economic life.” Let us turn first to them.
To prevent the structural partiality of the market from commodifying the whole life situation of citizens in a “tyrannical” way (Michael Walzer) and thus encroaching their real freedom and equal rights, we need a new category of civil rights in a civilized market economy referring to the socio-economic prerequisites of our status as really free citizens. The need for emancipatory economic citizenship rights is my third core thesis. In contrast to that, conventional social state concepts largely correct market results through subsequent redistribution and only mitigate the symptoms of the real un-freedom of losers in competition to help themselves. Whoever really wants to curb the social state must guarantee in advance, as a precondition of competition, fair chances for everyone to a self-determined lifestyle and existential security. In a programmatic nutshell, more emancipatory social policy aiming at the greatest possible real freedom of all citizens is vital. A societal debate about the socio-economic prerequisites of generalized civil freedom is vital.
Civic-liberal social policy is a counterbalance to the dominant political-social budgetism, which does not differ as radically from our law-and-order tradition as seems on first view. The ordo-liberalism and the social market economy built on it originally intended this. Alfred Muller-Armack (1966), the mentor of social market economy, envisioned a “second phase” of the social market economy in the following statements that are topical again today.
“Social-political problems will replace economic problems in the next phase of the social market economy. The challenges of the social market economy shift after solving the production problem in the framework of a fully-employed economy. In the future the social market economy must be understood as a policy of a free society”.
Wilhelm Roepke (1944) agrees:
“Up to now we mainly pursued economic policy; now social policy drives us”.
But as a result of hardly progressive explanation of political philosophy and economic ethics, the founders largely lacked their intuitions and intentions. Instead of developing an emancipatory civic-liberal social policy, Muller-Armack’s “irenic” formula of the social market economy was reduced more or less to a complement of the “free market” for the sake of subsequent corrective social policy (together with the symptomatic consequences of exploding welfare state costs). Illumining the confused relation of market economy and civil society is exciting and imperative. Only in this way we become aware of the decisive points where the “third way” as actually desired by their founding fathers can be continued to a fully developed civil society continues to a civilized market economy.
CIVIC VIRTUE: THE CULTURAL BOND OF A CIVLIZED MARKET ECONOMY
A widespread civic sense is the second elementary starting point for “civilizing” the market economy. Wilhelm Roepke urged a genuine “esprit civique” that binds the individual citizen to the whole and sets limits to his appetite (i.e. egoism).” In the sense of a republican liberalism, he writes:
“A power that strives to drive liberalism again and again in a dialectical process beyond itself doubtlessly lies in this world of ideas. This power is the idea of the self-liberation of people by appealing to the ratio essential for liberalism: the throwing off of bonds, the emancipation of people and the production of their autonomy” (Roepke 1947).
“Whoever now wants to understand liberalism as a primarily economic idea is caught in an `economistic’ narrowing and seems completely overtaken today. (…) Political-cultural liberalism is primary and economic liberalism (…) is somewhat secondary” (Roepke 1944).
Roepke comes to a social-critical judgment that appears like a presentiment of the most recent financial excess:
“We notice not without horror how far we all have already moved in the thought-habits of a basically un-civic world. We have already noticed that this is true above all for the economists when we spoke of their tendency to indulge unsuspectingly in thinking in money and income streams…” (Roepke 1958).
What seems to be progressively lost is a republican-liberal ethos of economic citizens. The core idea of this citizens‘ liberal economic ethos is integrity in economic life and analogously the business integrity of corporations and local governments (c f. Ulrich 2008, pp. 398ff.). Literally and in direct antithesis to the market-liberal principle of maximizing advantages and profit, the self-image of a good or “decent” citizen who follows private interests until they correspond to the legitimacy conditions of civil society is imperiled. Responsible citizens should not see any restriction or renunciation with such an ethos because it involves the society with which they identify and for whose “res publica” (public order) they feel jointly responsible. Such a republican public spirit is the supportive ground of personal ethical engagement so that not everything need be handed over to a constitutional authority. The exodus from greed goes without saying in a truly “civil” society. The bonus debate sends its greetings.
From this perspective, the current financial- and economic crisis can be understood as an extreme manifestation of a deeply-rooted orientation crisis. In its core, this crisis rests on the independence and absolutizing of “thinking in money- and income streams” (Wilhelm Roepke) on questions of practical orientation.
If this interpretation is correct, a permanent solution of the crisis is only possible in alliance with new social-political approaches under a socio-economic horizon of progress still needing enlightenment, not only with conventional economic-, political- and technical-financial prescriptions. Our main problem today is more the deficient know-what and know-why of a legitimate and meaningful reorientation of political-economic progress than deficient technical-financial know-how in controlling the free enterprise system. The overall concept of a fully developed civic society and an embedded civilized market economy could serve as a possible orientation. Wouldn’t that be a truly “civil” progress-project for the new 21st century?
Ulrich, P., Integrative Economic Ethics: Foundations of a Civilized Market Economy. Cambridge University Press, Cambridge/New York, 2008 (hardcover) resp. 2010 (paperback).