Political philosophy and the Paulson plan, a dialogue

wait, isn’t the kid their(wall street’s) kid too?

like wall street is the abusive father, and the taxpayers the abused mother. the economy is the dysfunctional kid caught in the middle of a dysfunctional family?

Congratulations on a wise and delightful post, Chris. No practical disagreements, but a question about the premise of luck egalitarianism. I agree entirely that

the choices people make in this actual world aren’t made against a background of equal resource endowments, and the inequality of those endowments may undermine the autonomy of people’s choices, and hence the extent to which we can reasonably hold them responsible. To put it bluntly, it reeks of bad faith to hold a poor and poorly educated person entirely responsible for that part of their fate that results from their choices, given the way in which their capacity to choose has been shaped by poverty and a poor education.

But shouldn’t “resource endowments” be extended to included genetic (eg, neurochemical) endowments, which, at least arguably, shape character and temperament as much as education and other contingencies? And if so, then what becomes of “choice”? Isn’t it, as William James said of free will, a “fifth wheel to the coach”?

A down-home example: from my raised-during-the-Great-Depression, one-generation-removed-from-Southern-Italian-peasant parents, I seem to have inherited the extreme aversion to risk that was manifest in every aspect of their lives. They wouldn’t even put their savings in a bank, much less the stock market (which, of course, soared during their lifetimes). Instead, they rolled up the bills and stuck them in the hollow legs of metal chairs. I’m not sure this entitles me to an equal share of every dashing entrepreneur’s or venture capitalist buccaneer’s pile. But it does seem to undercut the standard free-market justification for extreme inequality of wealth.

This “luck egalitarianism” seems philosophically rather shallow to me, unless it is supported by a theory of free will and decision making processes. I grant, that it allows for external factors to shape our decisions to an extent, but nevertheless free will is simply presupposed and what actually happens in the process of making a decision not further investigated.

“Luck egalitarianism” also seems to be a rather conservative theory: risk taking is penalized, playing it safe rewarded. Reminds me a bit of the authoritarian father in Dead Poet’s Society, who pressures his son into studying medicine, instead of letting him realize his dream of becoming an actor.

novakant; no, the whole point is to reward successful risk-taking, where risk-taking it deliberate and done against a background of equal opportunity. And, of course, to penalise failed risk taking of the same kind (unlike the Paulsen plan, which rewards risk taking whether successful or not). Also, luck egalitarians are (almost all) pluralists –LE is just one of many values or principles, to be weighed against others.

It is not exactly philosophically shallow — but I see why you think that. What it does is states a distributive principle, while leaving open the theory of responsibility (whatever your theory of responsibility you might, or might not, endorse LE).

Harry, why should we “reward successful risk-taking”? People who took a risk and succeeded are already being rewarded by society with money and status. Yet, the concept of risk entails that only a certain percentage succeed, while others fail, else it wouldn’t be a risk. Those who fail are already being penalized by society with lack of money and status. When you talk about penalising failed risk, do you mean we should punish them even more?

And all that is only speaking with hindsight, the concept of risk further entails that one cannot foresee the outcome, otherwise there wouldn’t be a risk. If somebody embarks on an acting career or starts a company, he cannot know if he’s good enough or if his business idea will take off – and even if he shows great talent or has a great business plan, there is a good amount of luck involved in determining the outcome. Of course we can tell people to minimize that risk, but a society cannot be made up solely of, say, accountants and pharmacists.

Don’t get me wrong, I don’t like finance big shots operating in a risk free zone, because they have guaranteed multi-million retirement packages. And I think it’s a good idea to steer regular people towards behaving responsibly in financial matters. But as a general principle, I don’t think “luck egalitarianism” holds up.

LE certainly says that when people knowingly and deliberately take a risk and it pays off then they should be allowed to profit, and that when it does not they should bear the loss. (…) choose the career you want, if it works out, fine, if it doesn’t, don’t expect others to bail you out.

But as I have pointed out above, that’s how capitalist societies on a base level work anyway – winners win, losers lose and nobody cares – and I don’t see what LE adds to that. I also don’t see how this is supposed to be a theory of the left, instead it’s a rather disjointed mix of levelling the playing field and social darwinism, and while we haven’t fully achieved the former, I’m certainly glad we have overcome the latter.

The problem with this ‘bankers vs ordinary people’ analysis, is that there are really two groups of ordinary people of interest here. Let us call these two groups the ‘grasshoppers’ and the ‘ants’. The grasshoppers seem to be the only ones our esteemed political philosopher can see, but the ants are there nonetheless there (and are actually many times more common than the grasshoppers). The ants certainly do resent being called upon to bail out the bankers, but they equally resent being called on the rescue the grasshoppers…

It’s the Ant and the Dragonfly, as far as I am concerned.

Slocum @16: the ants are “many times more common than the grasshoppers”
If by “grasshoppers” you mean people with a direct stake in the U.S. stock market’s ups & downs, keep in mind that that (for better or worse) is a very large number of people (given pension funds invested in the market, etc.). I don’t know the exact figures, but I wouldn’t be surprised if 50% of more of the population are “grasshoppers” in this sense. Of course some grasshoppers have a lot more than others; I’m certainly not defending the high levels of income and wealth inequality in the US, just making a factual point.

When what’s being “risked” is other people’s money, doesn’t the word lose any meaning in this context? If we define risk as some potential for those making the risky decisions to incur some loss, then the one thing the current version of Wall Street has managed to avoid almost entirely is risk. Forgive me for getting all anecdotal, but I know several men and women who worked on Wall Street (“worked” because they are all retired in their 50’s with tidy, low and high 6- and 7-figure nest eggs) and not a one of them ever risked a single dollar of their own money. They garnered enormous fees, commissions, salaries and breathtaking bonuses, and when they invested their own money it was in the surest of things informed by the surest of insider information (a dirty not-so-secret on Wall Street). They and their bosses were never, ever, concerned with long-term risk for themselves or their institutions, but immediate profits there for the taking, and who on earth was going to stop them, or even convince them to do otherwise? Regulators? Warren Buffet? The investors and instutions whose money fueled their gambling addiction were ones taking the risk, not Wall Street.

It adds compensation for unchosen disadvantage, whereas naked capitalism amplifies the effects of unchosen disadvantage.

Yeah, but I don’t need LE for that, it adds nothing new or interesting, efforts to level the playing field have been around for a long time , both on a theoretical and a policy level.

LE doesn’t say that a poor actor is, in any sense inferior to a rich medic, just that the latter doesn’t owe the former any support.

But in mixed economies the rich medic does bail out the poor actor, not directly, but indirectly through progressive taxation, welfare programs, subsidized education, public funding of arts programs etc. .

What both Timothy and abb1 said!

Dworkin would claim, I think, that his incarnation of LE (though, confusingly, he denies being one)

Yes, I’m confused by that. Could someone explain it to me?

What Timothy said. The institutions worked exactly the way they were supposed to work. The economy was in trouble and the Fed lowered the interest rates, just as it was supposed to. People started refinancing and buying – just as they were supposed to react to low interest rates. The banks facilitated this activity and profited from it, just like they should. There is really no individual or a group of individuals to blame here, everything worked like a clockwork.

Don’t like it? Change the system.

Ridiculous. It’s a system that was created by individuals and groups of individuals, for the benefit of said individuals and groups of individuals, so said individuals are utterly to blame.

“Don’t like it? Change the system.”

Ridiculous. It’s a system that was created by individuals and groups of individuals, for the benefit of said individuals and groups of individuals, so said individuals are utterly to blame.

In general the people who design a casino are not the people who gamble in it.

But to my mind the question how to design a workable system is separate from the question how to punish the people who created and operated the bad system.

I’d like to see a way to take their ill-gotten gains from them, but that’s tricky. You can’t prosecute them for things that weren’t illegal when they did them — it’s in the Constitution. To some extent we have to let them get away; they are a side-effect of letting Bush be president.

But we really need a new system. I would suggest first a new stock market, run by the US government as a non-profit. The Treasury keeps the money in a Treasury money-market account. The market keeps open books — anybody can look at the open limit orders. No naked short selling, no short selling at all except by explicit agreement between stockholders. Let stockholders choose which exchange will keep their stock; if the federal stock market has problems they can use another exchange. But they get a tax advantage for using the federal one…. It might be a good place to put retirement money. No brokers, no brokers fees, you can hire a broker to do market analysis etc but you don’t have to.

Second, require the largest corporations to split up. Anything that’s TBTF is too big. Some people argue that economy of scale makes it worth having them that big. But TBTF is a bigger diseconomy than any efficiency they could get from their size.

If we make the largest companies split up we’ll have to do something about insurance. Insurance companies are all about economy of scale. If they get too small they stop working. Maybe the government could do the more common insurance tasks? For a reasonable profit?

@Timothy Burke:

“deciding who took the riskiest choices and should suffer the most intense consequences is somewhat difficult”

The rating agencies who once rated CDOs as AAA and then, within a week in some cases, dropped their rating to junk might not be too difficult. How could they have been so wrong and still they prosper? Their conflicts of interest appear to be relevant.

Also, why is it legal to write insurance that guarantees your own debts? (Credit Default Swaps) You don’t have to be Warren Buffett to see that activity of that sort should be illegal. It is an example of regulatory failure where the heads that should roll are probably easily identifiable.