Banks Gone Bad: How Our Evolved Morality Has Failed Us

We seem to be unable to punish bankers for their scandalous behavior because our moral instincts can’t cope

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By Christopher Boehm

Rob a bank and you risk a long stretch in jail. Run a bank whose dubious behaviour leads to global economic collapse and you risk nothing of the sort, more likely a handsome pay-off.

Illegal and dangerous mistakes associated with the financial industry have caused serious harm to US and world economies. That is beyond doubt. And the scandals keep coming – rate rigging, money laundering, mis-selling and sanctions busting. The wider backlash against the industry shows no sign of easing.

So given the scale of damage and public anger, fuelled by the industry’s bonus culture, it is curious that those responsible have largely avoided punishment in the traditional judicial sense, despite the clamour for it.

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That we so want those involved to get their just deserts has its roots in ancient human forms of social control, which led to our modern sense of morality.

In their rudimentary, hunter-gatherer forms, crime and punishment surely go back for tens of millennia. The case has been made that by 45,000 years ago, or possibly earlier, people were practising moralistic social control much as we do.

Without exception, foraging groups that still exist today and best reflect this ancient way of life exert aggressive surveillance over their peers for the good of the group. Economic miscreants are mainly bullies who use threats or force to benefit themselves, along with thieves and cheats.

All are free-riders who take without giving, and all are punished by the group. This can range from mere criticism or ostracism to active shaming, ejection or even capital punishment. This moral behaviour was reinforced over the millennia that such egalitarian bands dominated human life.

Then around 12,000 years ago, larger, still-egalitarian sedentary tribes arrived with greater needs for centralised control. Eventually clusters of tribes formed authoritative chiefdoms. Next came early civilisations, with centrally prescribed and powerfully enforced moral orders. One thing tied these and modern, state-based moral systems to what came before and that was the human capacity for moral indignation. It remains strong today.

So there is an inevitable outcry when bankers seem to “get away with it”, offending this instinctive moral corrective sense.

And ultimately, such public opinion should strongly influence how we police fiscal deviants – but there are complicating factors that suggest this instinct is being undermined when it comes to taming the most harmful behaviour in the banking world.

Firstly, if popular morality has from ancient times been about protecting individual interests from damage through social predation, we must ask some questions. What happens when lawbreaking becomes embedded in large, hard-to-understand economic systems, and when the immediate damaging consequences seem to be diffuse and institutional, rather than direct and personal?

There is an obvious disconnect between what takes place in a small band, in which moral outrage leads to hurtful punishments that fit with hurtful crimes, and a very large system of international finance in which the negative consequences are so much less direct and the power to deter gets lost in the process.

To this we must add the fact that the US democratic system of popular representation, and to a degree that of other nations, is compromised by lobbying that too often amounts to institutionalised bribery. Reform is unlikely because the heavily lobbied politicians we elect are in charge of both our electoral system and, to an extent, our system of justice.

The result is that lobbies often trump what we fondly refer to as the people’s will, as long as really serious, electorally significant moral indignation in the populace can be avoided. Banking institutions loom large on the lobbying stage. A 2009 report from the International Monetary Fund concluded that lenders who lobbied most were those engaged in riskier practices.

Add in our long-standing tradition of coddling white-collar offenders whose acts seem to impact only on corporations, and the sheer complexity of judging the economic consequences of errant behaviour, and maybe we can better understand why moral outrage doesn’t translate into action.

Ultimately we are still left with what to do about this, how to regulate a free-market economy to deter behaviour that causes major fiscal problems. Morality aside, economists learned from the Soviet Union that excessive regulation leads to gross economic inefficiency, and most people in capitalist economies believe in having sensibly but minimally regulated economies that largely organise themselves.

Modern democracies are quite similar to egalitarian hunting bands in that moralistic public opinion helps to protect populaces against social predation, and dictates much of social policy. In a sense, the Founding Fathers were brilliant in creating a larger-scale system, one that basically guarantees personal autonomy yet permits enough centralised control to run a much bigger ship.

However, the sheer scale of society, combined with the internationalisation of business, has produced cognitive challenges that must, in an age of increasing manipulation by lobbyists, be met by ordinary voters. Fortunately, voters don’t always follow the political advertising money.

Simplistic solutions, such as criminalising any financial rule-breaking that leads to serious social harm, would provoke much debate. What is beyond debate is that in the case of major corporate crimes an ancient approach to making justice serve the greater good is creaking and groaning, and that new answers must be sought.

Originally published here.

2016 September 13

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  • John M Legge

    Fraud be damned. What about corporate manslaughter?

    Quoting my book:

    “One of the most notorious instances of directors avoiding responsibility for proven corporate manslaughter came in the aftermath of the Herald of Free Enterprise tragedy, when a vehicular ferry operated by P&O plc capsized while leaving Zeebrugge harbor in 1987, causing 143 fatalities. The directors whose instructions for staff reductions and faster turnarounds made this tragedy inevitable avoided a conviction for manslaughter by demonstrating that their instructions, while they may have made a fatal accident inevitable, did not directly cause this particular accident.”

    Recklessly killing 143 people with no consequences puts a little bit of financial finagling in the shade. There is a general problem that whatever the social and economic benefits of the corporate form it has become a vehicle for committing crimes with impunity. Adam Smith was prophetic on this one:

    “The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.”

  • Sorry, but this piece over simplifies the reality.

    The claim made that “What is beyond debate is that in the case of major corporate crimes an ancient approach to making justice serve the greater good is creaking and groaning, and that new answers must be sought” can in some contexts be seen as containing some truth, yet in other contexts be seen to be denying a much deeper truth.

    To understanding something of those contexts one must understand a little of the sorts of strategic responses that work most effectively in different contexts (the formal name for it is games theory, and in the broadest of brush strokes it is relatively simple).
    If we look at some simple cases, then go to more complex environments that involve many different cases, one can get a feel for what is going on.

    In its simplest form, there are two very broad classes of strategies possible, competition or cooperation. And I will acknowledge now that real life is rarely that simple, and usually involves complex mixes of competitive and cooperative contexts and strategies.

    What sort of strategy delivers the greatest payoff depends very much on the context, and lots of different factors are important in setting context.
    And breaking things down to the simplest of notions, if there is sufficient for all, then cooperation will always deliver greater benefit than competition; but if there isn’t enough for all, then competitive strategies win. And usually, there is some size of group for which if that group wins, there is enough for all of them, so cooperation to the level of that group size wins, so pure strategies are rarely present.

    Throughout our evolutionary history, it seems that most of the time circumstances have been such that for quite large groups it has always been more beneficial to cooperate than to compete, so we have many heuristics that make us a very cooperative species; and games theory is also clear that pure cooperation is always vulnerable to invasion by “cheating strategies” (that are less than cooperative) and so we require attendant strategies to detect and remove cheating strategies – so there can develop a sort of “evolutionary arms race” spiralling up and out through levels and domains and classes of strategies (in the deepest sense of the infinite mathematical space of possible strategic sets). There is a very real sense in which the ancient maxim “the price of liberty is eternal vigilance” will likely remain true for the rest of eternity. And provided we exercise such vigilance, to the best of our individual abilities and with a frequency appropriate to the context, then it appears that we have the technological and physical capacities to deliver a sufficient context of reasonable abundance to everyone on the planet for as far into the future as anyone can gain any sort of reasonable confidence.

    And our evolutionary history is also replete with periods of scarcity, so we all carry the shadows of those times, in our ability to compete hard if the context calls for it.

    And it does seem reasonably probable that we will be able to develop technologies to effectively mitigate the risks of any such time of scarcity occurring again in our future (and absolute certainty does not seem to be available to any in a world with the sorts of fundamental complexity and uncertainty that do in fact appear to be aspects of this reality we find ourselves in). And such a context makes it possible to cooperate with everyone (provided we have effective strategies for removing cheats, at every level).

    Yes, there are many senses in which the entire finance sector can be though of as a cheating strategy, a cancer on the body politic of humanity, and that applies to the systems, not necessarily to the people present within those systems (though certainly some of them have been conscious of the cheating nature of the strategy sets they were using, I suspect that number is actually quite small as a percentage of the total number of people involved). And that is becoming less possible to claim as this awareness spreads.

    The much deeper issue, is that markets generally are based in exchange, and exchange values are based in scarcity, and fully automated technology allows us to eliminate scarcity.

    So we are now at the point that technology will shortly allow us to eliminate scarcity, but that would break the economic systems we have at present.

    Scarcity (markets and money) has to go.
    universally available automated systems really does change everything.
    How we manage that transition is the key issue of our age.

    It seems that in the broader strategic sense, there are an infinite class of possible strategies that could work.

    It would seem that risk mitigation would encourage us to sample as broad a set as possible, and accept the exponentially expanding diversity that must result from any free exploration of any infinity.

    So yes – finance has had its day, and yes there may have been some conscious cheating, and for the most part, no.

    And we need to move past money and markets, and into the realm of universal abundance, and develop new models of what it means to be free individuals, within a context of social and ecological responsibility.

  • Sanction systems which may be informal as well as formal, e.g. state contract enforcement and statutory positive law, have served to justify the moral indignation or other reactions to disaster due to neglect or chicanery. However, the more typical sanction in everyday life is ‘anger’ which becomes diffuse and nonspecific – any target will do for any reason especially those unrelated to empirical reality in the legal or canonical sense. Others are scapegoated by one’s mood. Scapegoating is the basis of all moral/religious systems where the practice of projecting one’s own guilt onto others and vilifying them is the accepted form of sociality! People have their conceptual systems, their essences, before existents, before real actions or behavior occur. Social reality is a mud-slinging affair, not a cooperative or peaceful co-existence. Competition penetrates social life far more than cooperation, unless you consider some limitation on treachery and corruption cooperation!!