Megan McArdle has a post up where she follows up on her disgust with home owners who “walk away” from their mortgage obligations when they can continue to pay them. In California, and many other states, the bank can’t come after you if you walk away, so if your home is “underwater” then it is often a “rational” decision.
Megan makes the point that our economic and social system does not rely purely on rational self-interest, but also on an accumulated capital of norms which lead to virtuous cycles. My family is from Bangladesh, and I have seen this first hand. Corruption & nepotism in Bangladesh are almost impossible to change because it is stuck in an equilibrium state; if you are the first person to not be corrupt or nepotistic you’re only causing hardship to your family and relatives while others prosper. As an example, I have an uncle who works as a civil servant and has been promoted to a relatively high position because he is known to be someone who refuses to take bribes. The reason my uncle does not take bribes is mostly due to family tradition,* and, I suspect some personality quirks inherited from one of my grandfathers (he was a notoriously guileless individual, and that tendency has passed on to some of his children). Though his clean reputation means that he is in high esteem in the eyes of his colleagues, it is also a running joke that all of his subordinates live in palatial homes while he has a modest apartment! This causes some awkwardness because he simply can not entertain any of his subordinates since his material condition is so inferior to what they are accustomed to. In terms of innate moral character I doubt my uncle is elevated in any particular way from his colleagues and subordinates. Rather, he has an idiosyncratic and plainly irrational set of norms when it comes to maximizing his material wealth.**
Cultural norms can shift through positive feedback loops, and changes are not always reversible. Dan Ariely has reported this from his behavioral economic research; once you turn people into pure utility maximizing rational actors it is often hard to reverse their decision making heuristics so as to take on a softer edge. Anyway who wants to see the canonical shifts from vice to virtue to collapse to virtue repeatedly need only study Chinese history. From a purely utilitarian perspective I think Megan is correct. A sense of personal responsibility and norms which assume that one has a responsibility toward one’s fellow citizen beyond and above the call of the law can help ameliorate collective action problems and increase aggregate utility.
But…as noted by some of Megan’s critics in the comments of her posts, the problem is that we aren’t utility maximizing machines, rather, we have an innate sense of justice and inclination toward spite and retribution. Over the past few years it is clear that at the commanding heights of the American economy a substantial number of individuals were acting their own rational self-interest, within the letter of the law, while at the same time sacrificing the collective interest. Last year when I was reading about the collapse of LTCM in the late 1990s I learned that one of the traders, Eric Rosenfeld, nearly scuttled the bailout which rescued the financial markets from chaos because he was weighing whether it was in his personal interest. Because he was a partner his consent was necessary under the law. The bigger point is that there’s a perception in the American public now that the the elites of finance are corrupt and extract all they can get out of the system with full knowledge that they’re backstopped by the credit of the American government and have access to cheap government money. It’s all legal.
So I guess what I’m saying is that without elites who have a sense of virtue it is going to be really hard to maintain a moral window on personal behavior. This isn’t a matter of judgement, I think it’s a description. The people who are “walking away” are probably leading indicators of the sort of rational behavior which will become the norm as people realize that that sort of selfish behavior is spreading. In some communities with a strong spirit of collective identity and leadership from the top perhaps ostracism will prevent rational behavior on the individual level which might be a liability in the aggregate, but I suspect that more often many average Americans will simply justify their behavior to each other by pointing to the fact that a substantial number of elite Americans have no hesitation of screwing them if they can and it is in their interests. In other words, it has gone from what should you do, to what can you get away with. Of course this is a vicious circle, and not good for anyone.*** But that might not matter.
The financial sector is systemically important for a healthy economy. But a sense of virtue is systematically important for a healthy society. Bailing out the former has resulted in pulling the rug out from one of the perceptions which has buttressed the latter; that those who do well do so because they do good.
Related: The Harvard-Goldman Filter. We’d have a different country if it was the MIT/Stanford-Google/Intel filter.
* I was asked recently if this was not an extremely maladaptive tradition in a nation renowned for corruption. I think the issue here is that this side of my family lived off rents from their land holdings until the recent past, with many of the males holding positions of religious leadership due to the leisure that their income provided.
** Other family members went into professions which would minimize the necessity of corruption, at least as practitioners.
*** There are industries which make real things and provide real services.