Twentieth century economics — II

The ongoing financial crisis of 2008 has deep historical roots. To understand it, we must go back to sixteenth century Europe. Continual warfare and bloodshed among different Christian sects led to the search for a secular basis for society. They felt that they could not achieve cooperation in a society composed of religious groups with different goals. Secular thinkers promoted freedom and wealth as the core values of a secular society. One could expect different groups with conflicting goals to agree to these as common goals for the society. Freedom and wealth would provide each group with the possibility and material means to pursue whatever goal they desired.

Considerable effort was put into promoting freedom and wealth as desirable collective goals, because these were in conflict with prevailing and dominant religious conceptions. Efforts of secular thinkers led to the transition from the Biblical maxim “love of money is the root of all evil” to its opposite: “Lack of money is the root of all evil”. Duty to society takes precedence over individual liberty in traditional society. Secular thinkers created a political theory which put individual freedom above claims of the social order. These momentous changes were fundamental in creating the modern world.

Secular thinkers disagreed about the effects on society of allowing individual freedom and pursuit of wealth. The disagreement was about the nature of human beings. Rousseau felt that human beings were naturally good, and hence advocated anarchy — no rules or regulations of any kind were required. On the opposite extreme, Hobbes thought that human beings were naturally evil. Without strong government enforcement of extensive laws, life would be “nasty, brutish and short”. Locke took an intermediate position, finding society and government necessary, but with minimal rules acceptable by all.

The debate between Locke and Hobbes continues to this day in various guises. A very important ingredient in the victory of Locke’s minimal government views was the “invisible hand” argument of Adam Smith. Smith argued that even though people are selfish, society would benefit by allowing them freedom to pursue self-interest. This provided a counter to the Hobbesian idea that selfish individuals would destroy society unless there was extensive government control.

Laissez-faire economics is based on intellectual grounds prepared by Locke and Smith. It argues that one should allow maximum freedom to individuals in the economic sphere. Today we are witnessing, the outcomes of a social experiment spanning two centuries.

All religions and cultural traditions have asked individuals to sacrifice selfish pleasures to fulfil social obligations, and frowned on pursuit of wealth. The outcomes of this social experiment make clear why this is so. Contrary to the expectations of secular thinkers, individualistic pursuit of wealth and pleasure did not remain confined to the narrow domain of economic activities. When profits were permitted to trump compassion, the odious actions of Shakespeare’s Shylock, the Jew, became socially acceptable. Bankers threw millions out of their homes for non-payment of interest after the financial crisis of 2008. On the family front, placing pleasure over duty has led to ever increasing divorces, infidelity and illegitimate children. According to a recent UK report entitled “Fractured families”, “the fabric of family life has been stripped away”. This is a social disaster, since children are trained in families, and societies are shaped by how children are trained. More than a third of children in the US and UK are being brought up in broken homes. The tragic consequences are documented in many studies, which show a society with the highest divorce rates in the world, millions of unwanted teenage pregnancies, record rates of alcohol and drug abuse, depression and suicide and alarmingly high percentages of lying, cheating and theft among high school students. One of the economic consequences of promoting selfish pursuit of profits as a virtue is the global financial crisis of 2008, as we will show in the next part.

Published in The Express Tribune, April 30^th, 2011.