Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.
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Topics today include:
Is Greed Good?
Is the Central Economic Assumption of Maximizing Individual Benefit Valid?
Is Economics Ethical?
Morality in Business and Economics
Dollar Currency Pegs are Hurting
Global QT (Quantitative Tightening)
Wall Street Jobs that Disappeared in the Financial Crisis
Who Will Obama Nominate?
Russia - Israel Free Trade Agreement
Putin - Obama Phone Call
India Bond Market Boom
China Opens Bond Market to Individuals
Articles about events, conflicts and disease around the world
Five Countries Being Squeezed by Currency Pegs (Bloomberg) While attention is focused on Saudi Arabia and China who are struggling to maintain a U.S. dollar peg, five other countries are having majorproblems in that arena: Angola, Egypt, Nigeria, Tajikistan and Uzbekistan.
The case for “global quantitative tightening” (Sober Look) The concept of global QT gained traction in September 2015 as the negative correlation between global equities and foreign reserves increased. The Fed’s decision to maintain interest rates relieved the downward pressures on Renminbi and the interest in QT quickly waned. The author (Marcello Minenna) continues:
There have been reasoned opinions on the economic theory behind global QT. More than one analyst correctly observed that a USD asset sales by foreign central banks will not drain liquidity and counteract Fed monetary policy because these assets simply change hands and do not disappear. Changing ownership does not preclude reinvestment in the US banking system, which limits the sale’s tightening effect. Moreover, as already pointed out, changes in foreign reserves may not reflect a central bank’s attitude towards monetary policy since they do not account that other conventional monetary policy actions on banks’ reserves or interest rates can dominate changes of foreign reserves.
Who President Obama May Nominate To The Supreme Court (The Huffington Post) Names mentioned include Sri Srinivasan (moderate, sometimes liberal), Paul Watford (African-American), Mariano-Florentino "Tino" Cuéllar (Hispanic and active Democrat), Merrick Garland, Eric Holder, Loretta Lynch, Jeh Johnson, Don Verrilli, Neal Katyal, Jane Kelly (backed by Rep. Sen. Charles Grassley, Chair of the Senate Judicial Committee) and Orrin Hatch (former GOP senator from Utah), suggested by Sen Lindsey Graham (R, SC). See also next article.
Obama's Supreme Court short list (Politico) Not mentioned in preceding article is Patricia Ann Millett who would likely be a very contentious nominee. Repeated from the last article: Sri Srinivasan, Paul Watford , Merrick Garland and Lorretta Lynch. See also next article.
Think the financial crisis is over? Not for these jobs (CNBC) Jobs that have disappeared: Proprietary trading, many fixed income desk jobs, CDO structurers, Treasury bond sales people and wealth management brokers. The jobs that are growing today are in business and financial operations where the challenge is dealing with real accounting numbers. Many of those laid off in the crisis are not qualified, according to this article. Econintersect: Hmmmm!!!
Russia, Israel to sign free trade agreement shortly — Russian official (Tass) Hat tip to Sig Silber. The sides also agreed on mutual supplies of agricultural products, on setting up joint ventures and introduction of high technologies according to Deputy Agriculture Minister Sergey Levin said on Friday after talks with the Israeli side. Israeli Agriculture Minister Uri Ariel confirmed intentions to take the issue (regarding free trade zone) off the table within the shortest period of time.
Assad vows to retake all of Syria 'without hesitation' (Al Jazeera) Syrian President Bashar al-Assad has said his armed forces would try to retake the entire country "without hesitation", in an interview published after world powers agreed on a "cessation of hostilities". Speaking to the AFP news agency, Assad said the involvement of regional players in the conflict meant "that the solution will take a long time and will incur a heavy price".
Putin, Obama discuss on the phone Syrian settlement, situation in Ukraine (Tass) Presidents of Russia and the U.S. Vladimir Putin and Barack Obama during a telephone conversation discussed the Syrian settlement and the situation in Ukraine, the Kremlin said on Sunday. The telephone conversation was organized at the initiative of the U.S. side, according to Tass. During the conversation, Putin and Obama agreed to develop cooperation between diplomatic and other authorities to implement the Munich communique of the International Syria Support Group. See also next article.
Bear Market in Indian Equities Seen Driving Money to Bond Funds (Bloomberg) Indian fixed-income mutual funds are benefiting from an equity selloff that’s driven the benchmark stock gauge into a bear market. Kotak Mahindra Asset Management Co. and Axis Asset Management Co. predict increased inflows for debt plans, which in January took in the highest amount in three months as demand for equity products moderated. Rupee sovereign bonds returned 8.1% last year, while the S&P BSE Sensex index slumped 5%.
China opens bond market to individual investors (Xinhua,net) China's central bank on Sunday allowed individual investors to purchase all types of bonds over bank counters. Individuals with annual income of more than 500,000 yuan (around 76,500 U.S. dollars), 3 million yuan of financial assets and over two years of securities investment experience can now buy any bonds they like over the counter, according to a regulation released by the People's Bank of China (PBOC). Previously, only certificate treasury bonds were available to individuals. The new policy aims to boost the bond market and direct financing, the PBOC said.
Afghan civilian death and injuries 'reach record high' (BBC News) The number of people killed and wounded in conflict in Afghanistan rose in 2015 to the highest level yet recorded, the UN mission in the country says. There were 11,002 casualties in total, with a 37% increase in women affected and 14% for children. The Afghan government accused the Taliban of targeting civilians, especially women, to spread fear.
Other Economics and Business Items of Note and Miscellanea
Do Economists Actually Believe “Greed is Good”? (Evonomics) In September 1970 Milton Friedman published an article in The New York Times Magazine, “The Social Responsibility of Business is to Increase its Profits.” Friedman, who has received the Nobel Prize in Economics in 1976, is probably the most influential economist of the second half of the twentieth century. His views have become the mainstream economic thinking, although few economists today care to state them as boldly as Friedman. Econintersect: Was Friedman correct? Is there no business responsibility to the future of that business? What are the relative weights for profit now and future profits? Is profit the ultimate measure of success? We suggest that using profit as the measure of success is only appropriate if all "externalities" are properly accounted. And then profit must be some function integrated over all time so that enrichment now is not overvalued by ignoring impoverishment in the future. Our conclusion? Profits measured in real time are a very poor measure of the societal benefit (success) of a business. Friedman's proposition was, in our opinion, an intellectually "cheap" escape from larger issues which are not readily amenable to quantification. See the following articles.
Henry and Kant: outsourcing morality (globalinequality) Branko Milanovic discusses the assumption of many in economics that the "science" is absent morality including the argument that this is correctly so. He calls that the “outsourcing of morality" and infers this is a weakness in the discipline. Here is his summation of the mainstream argument:
... in life everything is allowed in order to achieve one’s objective, and one should not feel at all bad or dishonest for doing it. Institutions ought to prevent the achievement of such goals by illegal means. If I am a trader on Wall Street, my objective is to make money, by whatever means I can. It is the role of institutions to stop me. If they failed and the financial crisis happened, it is because they were badly designed. The entire moral order of society is outsourced, away from individuals and their internal controls to institutions. We do not expect ourselves to be moral and behave fairly. It is not our duty: it is the duty of society to provide good institutions which would punish those who steal and lie, and to create a good system of incentives which would reward those who contribute to society through their work, capital or inventiveness.
This position is close to the heart of many economists. If the institutions and the system of incentives are well “calibrated", the society will move forward because misconduct will be punished and good behavior rewarded. This will come about because each of us is a rational and profit-seeking individual and will follow own interests. The institutions will ideally “channel” our passions and interests so well that we shall, as “if led by an invisible hand”, be doing the things that are both in our own and social interest.
Can economics be ethical? (Prospect) Iain King says that much of the difficulty in considering the role of ethics in economics has to do with diverse interpretations of what ethics encompass. Much of this article is a discussion of the myriad of representations of ethics in economic and social systems. He comes to a conclusion (excerpted below) that humans collectively (social systems) and not individuals are the logical way to define ethics.
Whenever we feel queasy about “perfect” competitive markets, the problem is often rooted in a phoney conception of people. The model of man on which classical economics is based—an entirely rational and selfish being—is a parody, as John Stuart Mill, the philosopher who pioneered the model, accepted. Most people—even economists—now accept that this “economic man” is a fiction. We behave like a herd; we fear losses more than we hope for gains; rarely can our brains process all the relevant facts.
These human quirks mean we can never make purely “rational” decisions. A new wave of behavioural economists, aided by neuroscientists, is trying to understand our psychology, both alone and in groups, so they can anticipate our decisions in the marketplace more accurately. But psychology can also help us understand why we react in disgust at economic injustice, or accept a moral law as universal. Which means that the relatively new science of human behaviour might also define ethics for us. Ethical economics would then emerge from one of the least likely places: economists themselves.
Economics For Ethics(The Critique) An excellent review by Professor Thomas Wells (University of Groningen). Don't settle for the excerpt below, read the entire piece. Wells thinks that economists have been engaged in avoidance when it comes to issues of ethics and morality and that condition must chnage.
Economists should be much more sensitive to the perspectives that moral philosophers can bring, and much less eager to retreat into positive theory and scientific neutrality (as they have been more or less since the Marginalist revolution). Economists greatest ethical problem is not their lack of ethical interests and analysis, but their belief that economic scientists shouldn’t talk about ethics. And they need to talk about their ethics, to each other, to the public, and to moral philosophers. Not only in the direct technical advice they give governments but also indirectly in their training of undergraduates and their choice of research questions and techniques, what economists do and say matters for society in a way that subjects like physics does not. The challenge for economists is to make their ethical science better: to understand both the capacities and limits of their economics ethics, to incorporate that understanding more fully into their work, and to articulate this to sceptical philosophers and public alike.
Ethics and Economics (The Library of Economics and Liberty) A thorough, readable discussion of the fundamental connections between economic issues and ethical issues, albeit with a libertarian bias which may put off some "collectivists". Here is an excerpt:
Ethical issues connect intimately with economic issues. Take the economic practice of doing a cost-benefit analysis. You could spend one hundred dollars for a night on the town, or you could donate that one hundred dollars to the reelection campaign of your favorite politician. Which option is better? The night on the town increases pleasure. A politician’s successful campaign may lead to more liberty in the long term. We regularly make decisions like this, weighing our options by measuring their likely costs and likely benefits against each other.
This connects economics directly to a major issue in ethics: By what standard do we determine what counts as a benefit or a cost? A list of competing candidates for the status of ultimate value standard includes happiness, satisfying the will of God, long-term survival, liberty, duty, and equality.
Economists implicitly adopt a value framework when beginning a cost-benefit analysis. Different value commitments can lead to the same item being considered a cost from one perspective and a benefit from another. For example, those whose standard of value is increasing human happiness would count a new road to a scenic mountain vista as a benefit, while those whose standard is maintaining an unchanged natural environment would count it as a cost.
The results of economic analysis also lead directly to ethical issues. For example, one result of the nineteenth- and twentieth-century debate over capitalism and socialism is a general consensus that capitalism is effective at producing wealth and socialism is effective at keeping people poor. Advocates of capitalism use these results to argue that capitalism is good; others might respond that “socialism is good in theory, but unfortunately it is not practical.” Implicit in the capitalist position is the view that practical consequences determine goodness. By contrast, implicit in the position of those who believe socialism to be an impractical moral ideal is the view that goodness is distinct from practical consequences.
How the Myth of Self-interest Caused the Global Crisis (Psychology Today) Two psychologists psychoanalyze the economics profession. They draw on the history of human evolution to conclude that the premise of optimization of society through the maximization of individual self-interest is a flawed assumption. They say that collaboration and cooperation has always been the hallmark of successful societies throughout evolutionary history. (GEI contributor Roger Erickson likes to talk about this using the term "return on coordination" to explain why the total is greater than the sum of the individual parts.) The conclusion from this essay:
Unfortunately, the way many firms operated in the early 21st century was to deny these cooperative instincts. People who were recruited to the top jobs in banks and utility companies were selected for their ambition and lust for money. As if led by an invisible hand, they would do things that were good for the company or society as a whole. We have seen all too well where this ended.
For instance, inspired by neo-economic theory and persuaded by leading consultancy firms such as McKinsey, Enron organized their famous Talent days where they would recruit the sharpest and most competitive students from prestigious MBA programs without any regard for their cooperative skills and moral standards (this is sadly not generally taught at in MBA programms). No surprise that there was a culture of competition, deception, and greed at Enron and no surprise the firm went down in a spectacular way. Banks, firms, and even entire nations have gone bankrupt because they perpetuated the myth of self-interest, while denying human social instincts. It is time for a paradigm shift in economics, and business science and policy.
For a valuable collection of essays on the relationships between evolution and modern society, see This View of Life.
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