Ethics, Finance and Crisis,

(an excerpt from the Ethical Economy book, sneak preview at

These might seem like three terms picked at random. However I would like to suggest that beyond its direct, contingent causes, the current financial crisis is a symptom of the emergence of a new economic system, where value is increasingly based on ethical factors, or on ‘life conduct’. I call this an ethical economy: and I will try to explain why, and how it relates to the current crisis.

The last ‘Great Crisis’ that lends itself to (imperfect) comparison with today’s events was the Crisis of 1929 followed by the Great Depression of the 1930s. The Great Crisis was triggered by an over-valuation of industrial stock which had accelerated during the post-War boom of the ‘roaring twenties’. Industrial profits, private savings (and borrowed money) were pumped into stock markets where stock prices were inflated. Like today this exuberance produced a situation where nobody really knew what the stocks were actually worth. Instead their value were related to the overall tendency of the stock market to keep rising. So the basic mechanisms behind the bubble and crash (like in all bubble crash and cycles) was the absence of a measure of the real value of stock, and its replacement by a self-referential measure that related the value of stock to the presumed future dynamics of the stock market itself.

The post-War, Keynesian solution, which served to guarantee a relatively smooth financial development up until the oil crisis of 1973, and the following neo-liberal deregulation, was premised on the establishment and institutionalization of such a measure. This happened through the Fordist compromise between capital and labour, which institutionalized the productivity of industrial labour as the established measure of all economic values, including the value of stock. This establishment of an institutionalized measure happened through a democratization of the standards of value. Up until the 1930s, the people had no insight in the ways in which economic value standards were set. Instead such standards were set by a small minority of market operators who followed what we would today call a ‘swarm logic’. With the Fordist compromise, popular representatives (principally the labour movement) came to have a say in determining what standards of values should prevail. This way these standards also acquired a wider democratic base, which made them enduring and robust as they now corresponded to what was a shared view of what constitutes ‘real value’.

Today, the dynamics leading up to the financial crisis are very much the same. We have seen an exploding share of immeasurable values that are capitalized on on financial markets (so called ‘intangibles’) and a generalized insecurity of the ‘real values’ of the assets that back the various kinds of securities that circulate. As a consequence, the credit and real estate boom that preceded the crisis was premised on a self-referential pricing mechanism: The value of a house was thought to be determined by the continuous upward movement of the housing market. Like in 1929, there is no democratic influence on how the standards of value for these kinds of assets are determined, and hence no way of guaranteeing that they correspond to a shared view of what constitutes ‘real value’.

But the today the assets are different form those of the 1920s. The most important assets in todays financial crack – mortgage-backed securities, credit card debt and many intangibles, like brand values are essentially securitizations of what we could call ‘life conduct’. The value of a mortgage or of  credit card debt depends on the life conduct of the borrower. The value of a brand depends on the life conduct of consumers (this is actually what is measured in brand valuation schemes) and of the ethical conduct of the company that owns the brand; the value of a real estate market depends on the life conduct of  the inhabitants of a neighborhood or a city- after all this is what ‘creative city’ policies are all about. And to a large extent the productivity of a knowledge intensive company is about the life-conduct of its employees. So in many ways current financial markets build on the direct securitization of life-conduct, of ethically coherent forms of life. Swiss-Italian economist Christian Marazzi pointed this out long ago. Looking at the New York financial crisis of 1929, for many the origin of the neoliberal era, he showed how the privatization of city debt (through city bonds sold to the middle classes) gave a direct economic importance to the life-conduct of the poor. This, he argues, was the origin of the neoliberal era with its combination of freedom of private property and discipline for the propertyless.

So the present crisis was preceded by a boom that built essentially on the securitization of life conduct, where the ethics of everyday life became a direct foundation of value. Like in the 1920s, however, the crisis resulted form a lack of rational measurements of the value of such forms of life conduct. What kinds of lessons can we draw form this?

Many voices on the left (and on the right) speak of a severe restriction of the power and freedom of financial markets. This is probably not a good idea. There are many reasons that suggest that a financial distribution of value is in fact a functional response to a situation in which the production of wealth is thoroughly socialized and operates through the putting to work of social capital and what Marx called General Intellect, rather then through the direct deployment of labour time and private capital. In this sense financial markets serve to distribute a global surplus, which is essentially produced in common. What we need is a democratization of the standards of value. We need established, generally accepted standards for how to value forms of life conduct to underpin a rational valuation of the securities that they support. How can this be done? A centralized authority build around the state, like in the Fordist compromise is simply not possible. Furthermore, standards of life conduct are multifaceted, so that a rational measurement requires a multitude of points of view. This seems like a task for the collective intelligence of the networked multitude! My suggestion would be to use social media platforms that combine the functions of networking and rating. (These are already emerging, networking sites like Facebook are enormously popular; according to the PEW Internet and American life project in September 2007, 32 per cent of the US internet population had rated a person or product online) If E bay is able to give a rational and generally accepted value to the life conduct of its users (is the seller trustworthy or not?), then something similar could perhaps work for financial securities? Consumers, workers and other stake-holders involved in the globalized production of a branded commodity continuously rate the social impact of the brand. Their ratings are aggregated into an quantitative index that serves as an input for financial operators. When I go to the bank and ask for a mortgage I present a quantitative ethical index that summarizes what people in my networks think of my trustworthiness and general life conduct. That index affects the interest rate I would have to pay on my loan, and consequently the risk and price of the security that the bank subsequently derives from the mortgage An ethical economy? An Orwellian nightmare?

2 Comments Ethics, Finance and Crisis,

  1. Michel Bauwens

    Dear Adam:

    a very interesting contribution, and I of course concur with the gist, but it is also a little troubling.

    Granted that finance puts a value on ethical intangibles, but 1) they don’t seem to do it very well; 2) there has been absolute exaggerated over-leveraging. Limiting the freedom of financial markets is usually aimed at the second phenomena. I’m tempted to think that this is really crucial, and that we need some objective basis for valuation (see Bernard Lietaer’s proposal for a global currency based on a basket of commodities, etc…)

    From your text, the link between social evaluation through networks, and the financial consequences of this, is not yet very clear to me, could you elaborate?


  2. Pingback: P2P Foundation » Blog Archive » The financial evaluation of reputation

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