Hegel on Wall Street

As of today, the Troubled Asset Relief Program, known as TARP, the emergency bailouts born in the financial panic of 2008, is no more. Done. Finished. Kaput.

Last month the Congressional Oversight Panel issued a report assessing the program. It makes for grim reading.  Once it is conceded that government intervention was necessary and generally successful in heading off an economic disaster, the narrative heads downhill quickly: TARP was badly mismanaged, the report says, it created significant moral hazard and failed miserably in providing mortgage foreclosure relief.

That may not seem like a shocking revelation. Everyone left, right, center, red state, blue state, even Martians — hated the bailout of Wall Street, apart of course from the bankers and dealers themselves, who could not even manage a grace moment of red-faced shame before they eagerly restocked their far from empty vaults.  A perhaps bare majority, or more likely just a significant minority, nonetheless thought the bailouts were necessary.  But even those who thought them necessary were grieved and repulsed.  There was, I am suggesting, no moral disagreement about TARP and the bailouts — they stank. The only significant disagreement was practical and causal: would the impact of not bailing out the banks be catastrophic for the economy as a whole or not?  No one truly knew the answer to this question, but that being so the government decided that it could not and should not play roulette with the future of the nation and did the dirty deed.

Erin Schell

That we all agreed about the moral ugliness of the bailouts should have led us to implementing new and powerful regulatory mechanisms.  The financial overhaul bill that passed congress in July certainly fell well short of what would be necessary to head-off the next crisis.  Clearly, political deal-making and the influence of Wall Street over our politicians is part of the explanation for this failure; but the failure also expressed continuing disagreement about the nature of the free market.  In pondering this issue I want to, again, draw on the resources of Georg W.F. Hegel.  He is not, by a long shot, the only philosopher who could provide a glimmer of philosophical illumination in this area.  But the primary topic of his practical philosophy was analyzing the exact point where modern individualism and the essential institutions of modern life meet.  And right now, this is also where many of the hot-button topics of the day reside.

Hegel, of course, never directly wrote about Wall Street, but he was philosophically invested in the logic of market relations.  Near the middle of the “Phenomenology of Spirit” (1807), he presents an argument that says, in effect: if Wall Street brokers and bankers understood themselves and their institutional world aright, they would not only accede to firm regulatory controls to govern their actions, but would enthusiastically welcome regulation.  Hegel’s emphatic but paradoxical way of stating this is to say that if the free market individualist acts “in [his] own self-interest, [he] simply does not know what [he] is doing, and if [he] affirms that all men act in their own self-interest, [he] merely asserts that all men are not really aware of what acting really amounts to.”  For Hegel, the idea of unconditioned rational self-interest — of, say, acting solely on the motive of making a maximal profit — simply mistakes what human action is or could be, and is thus rationally unintelligible.  Self-interested action, in the sense it used by contemporary brokers and bankers, is impossible.  If Hegel is right, there may be deeper and more basic reasons for strong market regulation than we have imagined.

The “Phenomenology” is a philosophical portrait gallery that presents depictions, one after another, of different, fundamental ways in which individuals and societies have understood themselves.  Each self-understanding has two parts: an account of how a particular kind of self understands itself and, then, an account of the world that the self considers its natural counterpart.  Hegel narrates how each formation of self and world collapses because of a mismatch between self-conception and how that self conceives of the larger world.  Hegel thinks we can see how history has been driven by misshapen forms of life in which the self-understanding of agents and the worldly practices they participate in fail to correspond.  With great drama, he claims that his narrative is a “highway of despair.”

The discussion of market rationality occurs in a section of the “Phenomenology” called “Virtue and the way of the world.”  Believing in the natural goodness of man, the virtuous self strives after moral self-perfection in opposition to the wicked self-interested practices of the marketplace, the so-called “way of the world.”  Most of this section is dedicated to demonstrating how hollow and absurd is the idea of a “knight of virtue” — a fuzzy, liberal Don Quixote tramping around a modern world in which the free market is the central institution.  Against the virtuous self’s “pompous talk about what is best for humanity and about the oppression of humanity, this incessant chatting about the sacrifice of the good,” the “way of the world” is easily victorious.

However, what Hegel’s probing account means to show is that the defender of holier-than-thou virtue and the self-interested Wall Street banker are making the same error from opposing points of view.  Each supposes he has a true understanding of what naturally moves individuals to action.  The knight of virtue thinks we are intrinsically good and that acting in the nasty, individualist, market world requires the sacrifice of natural goodness; the banker believes that only raw self-interest, the profit motive, ever leads to successful actions.

Both are wrong because, finally, it is not motives but actions that matter, and how those actions hang together to make a practical world.  What makes the propounding of virtue illusory — just so much rhetoric — is that there is no world, no interlocking set of practices into which its actions could fit and have traction: propounding peace and love without practical or institutional engagement is delusion, not virtue.  Conversely, what makes self-interested individuality effective is not its self-interested motives, but that there is an elaborate system of practices that supports, empowers, and gives enduring significance to the banker’s actions.  Actions only succeed as parts of practices that can reproduce themselves over time.  To will an action is to will a practical world in which actions of that kind can be satisfied — no corresponding world, no satisfaction.  Hence the banker must have a world-interest as the counterpart to his self-interest or his actions would become as illusory as those of the knight of virtue.  What bankers do, Hegel is urging, is satisfy a function within a complex system that gives their actions functional significance.

Actions are elements of practices, and practices give individual actions their meaning. Without the game of basketball, there are just balls flying around with no purpose.  The rules of the game give the action of putting the ball through the net the meaning of scoring, where scoring is something one does for the sake of the team.   A star player can forget all this and pursue personal glory, his private self-interest.  But if that star — say, Kobe Bryant — forgets his team in the process, he may, in the short term, get rich, but the team will lose.  Only by playing his role on the team, by having an L.A. Laker interest as well as a Kobe Bryant interest, can he succeed.  I guess in this analogy, Phil Jackson has the role of “the regulator.”

The series of events leading up to near economic collapse have shown Wall Street traders and bankers to be essentially knights of self-interest — bad Kobe Bryants.  The function of Wall Street is the allocation of capital; as Adam Smith instructed, Wall Street’s task is to get capital to wherever it will do the most good in the production of goods and services.  When the financial sector is fulfilling its function well, an individual banker succeeds only if he is routinely successful in placing investors’ capital in businesses that over time are profitable.  Time matters here because what must be promoted is the practice’s capacity to reproduce itself.  In this simplified scenario, Wall Street profits are tightly bound to the extra wealth produced by successful industries.

Every account of the financial crisis points to a terrifying series of structures that all have the same character: the profit-driven actions of the financial sector became increasingly detached from their function of supporting and advancing the growth of capital.  What thus emerged were patterns of action which, may have seemed to reflect the “ways of the world” but in financial terms, were as empty as those of a knight of virtue, leading to the near collapse of the system as a whole.  A system of compensation that provides huge bonuses based on short-term profits necessarily ignores the long-term interests of investors. As does a system that ignores the creditworthiness of borrowers; allows credit rating agencies to be paid by those they rate and encourages the creation of highly complex and deceptive financial instruments.  In each case, the actions — and profits — of the financial agents became insulated from both the interests of investors and the wealth-creating needs of industry.

Despite the fact that we have seen how current practices are practically self-defeating for the system as a whole, the bill that emerged from the Congress comes nowhere near putting an end to the practices that necessitated the bailouts.  Every one of those practices will remain in place with just a veneer of regulation giving them the look of legitimacy.

What market regulations should prohibit are practices in which profit-taking can routinely occur without wealth creation; wealth creation is the world-interest that makes bankers’ self-interest possible.  Arguments that market discipline, the discipline of self-interest, should allow Wall Street to remain self-regulating only reveal that Wall Street, as Hegel would say, “simply does not know what it is doing.”

We know that nearly all the financial conditions that led to the economic crisis were the same in Canada as they were in the United States with a single, glaring exception: Canada did not deregulate its banks and financial sector, and, as a consequence, Canada avoided the worst of the economic crisis that continues to warp the infrastructure of American life.  Nothing but fierce and smart government regulation can head off another American economic crisis in the future.  This is not a matter of “balancing” the interests of free-market inventiveness against the need for stability; nor is it a matter of a clash between the ideology of the free-market versus the ideology of government control.  Nor is it, even, a matter of a choice between neo-liberal economic theory and neo-Keynesian theory.  Rather, as Hegel would have insisted, regulation is the force of reason needed to undo the concoctions of fantasy.

J.M. Bernstein is University Distinguished Professor of Philosophy at the New School for Social Research and the author of five books. He is now completing a book entitled “Torture and Dignity.”