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> | This is the revised version of the JuanCoeymansFirstPaper |
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< | Golden Arches of Fear |
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> | The end of the world as we know it? |
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< | -- By JuanCoeymans - 27 Feb 2009 |
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> | The huge impact of the economic crisis throughout the world has raised the question about whether capitalism will survive the current economic debacle. |
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> | Likewise, the question about the “end of capitalism” has been continuously present during our class discussions in Law and the Contemporary Society. The proposed idea suggests that the current crisis not only evaporated home values, but also destroyed and buried an entire economic system. The proposition also suggests that law students (as future license holders) should be prepared not for the world that they were expecting out of law school, but for an entire different world yet to come. Moreover, as young and unleveraged professionals, they should have a leading role in the construction of the new social and economic order. |
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< | The instruction is clear: "No servant can serve two masters" (Gospel according to Lucas, 16:13). However, since the current semester began, I have been serving two masters. Every Tuesday and Thursday, after thinking about the intangible law and economics ideas of my Deals class, the harsh reality of Law and the Contemporary Society is expecting me at the next door. |
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> | Such plan sounds compelling. For those who still can travel light, the opportunity to develop a more justice and human economic system come out as a unique opportunity to engage our talents in something greater than our personal ambitions. |
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< | You need a “cast-iron” stomach to digest such contradict approaches. In Deals world, the result of any bargaining process is a function of asymmetric information, consumer preferences, moral hazard, reservation prices, Coasian transaction costs, among other microeconomic explanations. In the Leff’s world, depression, self confidence, sense of belonging, loneliness, anxiety, greediness, are some of the key factors to explain why people make deals. Moreover, in Deals world, the indifference curves and budget constraints are useful devices to human decision making. In Leff and Arnold’s world, human “decision making” is almost a fairy tale. |
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> | However, is the existing crisis a real turning point for capitalist societies? Do we face a period in which our economic system will be completely reshaped? Of course, such complex questions cannot be completely answered in the following lines, but some perspectives on this regard might be suggested. |
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< | My first impression was that these two worlds were absolutely irreconcilable. On the one hand, microeconomics models are accurate human behavior predictors if you assume (of course) the ceteris paribus condition. On the other, the “all the other things being equal” condition means that humans feelings, emotions, experiences and social relations do not play a role in the miraculous dimension in which demand crosses supply. In other words, we know that humans have complex sociological and psychological features, but we need to ignore them in order to construct a useful economic model. Otherwise, you cannot predict anything at all. Then, I started to think that the scope of Cohen’s transcendental nonsense was larger than just the legal problem. |
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> | Are we witnessing the death of capitalism? |
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< | Yet, a moment of epiphany in Deals class revealed me the truth: microeconomic explanations of human behavior do not work against the very nature of human beings. On the contrary, the latter is based on the former. The paradigmatic expression of this communion between them is one of the most frequent emotional responses of human beings: fear. Economists call it “uncertainty”. We can call it just fear. |
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> | One warning in this respect is that any categorical conclusion at this point in time might be too early. We are just beginning to suffer the cost of the crisis in the so-called “real economy” and no one knows with certainty when all this is going to end. This seriously affects the way in which we debate the problem, and therefore, any conclusion derived from it. |
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< | This idea came to my mind by grace of McDonalds? Corporation. Or more exactly, when we were discussing a delightful paper called “Costs of Control: Source of Economics Rents for McDonalds? Franchisees” in Deals class. Therefore, let me use this particular example to show how fear plays a key role in the microeconomic explanation of reality. |
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> | In fact, those who for years have been critics of the prevalent system have found a unique opportunity to attack it, without the necessity of sustain their position with strong rationales. Certainly, when people are losing jobs, retirement savings and homes, you do not need a persuasive discourse to convince them that the liberal policies of the previous years were the cause of the present disaster. Reality is enough. I am not suggesting that the unregulated framework of the United States economy is not the cause of the current crisis. On the contrary, although I believe that the unbridled financial laissez faire is probably one of the most plausible explanations for this debacle, public discussion in this regard has lacked of sufficient depth. |
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< | According to the mentioned paper, the individuals that McDonalds? wants to have as franchisees must face liquidity constraints. For incentives purposes, in selecting its franchisees McDonalds? decided not to separate the management of the restaurant from its ownership. As well, the company established policies against passive investors and absentee owners, including partnerships, real estate developers and corporations. In words of McDonalds? corporate managers “People most likely to get interviews are those with 'ketchup in their veins'-a McDonalds? expression for outgoing, high-energy types who will devote their lives to the Golden Arches.” |
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> | On the other side, those economists (Nobel prizes included) that for years defended the robustness of the economic model have kept a comfortable silence. Certainly, a reconsideration of their theories (for instance, those about perfect capital markets) under the scrutiny of reality should be a hard exercise. Moreover, those who have publicly defended free market policies have been incapable to look at the flaws of the model, reducing the whole problem to a matter of excessive governmental intervention. |
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< | This idea was complemented in class by my professors. They explained that liquidity constraint of candidates was a key factor of McDonalds? business plan. According to their explanation, if you do not face liquidity constrains (in other words, if you are relatively rich), the fear of losing the McDonalds? franchise disappear, even if you paid a relatively high upfront price for it. On the other hand, if you face “liquidity constrains” (which means, if you are relatively poor and bet a great amount of your capital in McDonalds? business), and you do not fulfill the franchise agreement (losing the franchise), you will not be able to “pay for your daughter’s tuition, pay for health care, mortgage, etc…and such future condition creates a lot of fear and pain”. |
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> | Despite the confusion in the public debate, do we have some hints to measure the magnitude of this crisis and to affirm that this downturn will trigger a reformulation of the entire system? |
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< | The incentive structure (or the threat) of McDonalds? is simple: they use fear and pain against people as the moving force for its corporate mission. A fear that is strong enough to give your life and blood to the Golden Arches. |
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> | I am skeptical in this respect. Economic fluctuations, regardless their specific causes, are recurrent in history. As well, political and economic institutions in the recent history have shown to be, as the economy itself, quite cyclical. Actually, if we look at the effects of the downturn suffered since 1929 (which hit the economy even harder), we find a cyclical behavior both in the economic ideas and policymaking trends. In the following years after the Great Depression, the significant observations of Lord Keynes influenced the way in which most of economist described the economy for decades and, even most important, the way in which governments structured the economic institutions and policies throughout the world. |
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< | However, the most surprising conclusion is not that of McDonalds? business plan, but the fact that these ideas were accurately described in the Mecca of the Law and Economics movement (Journal of Law and Economics), and ratified in Deals class by my “law and economics” professors. Neither the paper nor my professors used the ceteris paribus condition in order to get ride of the psychological and sociological complexities of human nature. Quite the opposite, they demonstrated that fear is a fundamental reason to explain how people behave in the world of utility maximization. |
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> | However, once some failures of the Keynesian policies become more visible, the critics of such ideas (leaded by Friedman and company) gain support and a new economic model was implanted in the US and exported to those countries under the US patronage. Since then, advocates of free markets have tasted the flavor of triumph and preached the inexorable path of the world toward liberal capitalism. |
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< | Fear is not only present in the McDonalds? corporate structure. Fear is an omnipresent emotion inherent to our ignorance about the future, about everything that seems uncertain and unknown. In these sense, the idea of monetary costs or loses is strongly linked to the concept of fear. When we think about the probability of experimenting loses (money, utility, wealth) we just fear. Our usual standards of live will be in jeopardy, our consumption patterns will be constrained by lower budgets, and therefore, the social role that has been assigned and previously played (for instance, a successful young lawyer) could be in danger. In my Deals professor’s words, “such future condition creates a lot of fear and pain”. |
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> | And now that this model has shown (again) its intrinsic failures, why we should expect a different historic process? The american economic institutions will probably change in a similar way they did it in the past. In the 1930s we had a movement toward securities regulation and now everybody is claiming for a more regulated financial system. In the 1930s Roosevelt committed his efforts to a New Deal and now people is discussing about Obama´s New Deal. Surely the role of government in the economy will probably increase in the years to come. Yet, how we could suggest that such trend will go further and last forever? |
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< | The economic approach suggests that public and private structures should be designed to provide private incentives toward maximization of social wealth. As well, economists claim that private action will be aligned with the social interest, only if private agents internalize the total cost of their actions. What is suggested in such idea? That maximization of social welfare could be only reached if we efficiently allocate fear throughout the economy. Thus, the efficient allocation of resources depends in our capacity to threat people with a future of pain. |
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> | I cannot find indications that the foundations of neoliberal capitalism will not survive this crisis, not because of its intrinsic strength and consistency, but because history, rather than a dialect movement toward human kind progress, usually moves on cyclical and pendular waves. In other words, those who suggest that capitalism is already dead might be overestimating the human ability to learn from previous mistakes. |
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< | I am aware that this idea might sounds awful, but works. It works for McDonalds? and also works for me: since I realized that economics are secretly married with human nature, on Tuesday and Thursday I only serve one master.
- I don't understand the logic of this at all. You discovered that micro-economic theory was not psychologically reductive because someone presented a thin sociological account of franchising? Because a particular formulation explains how purchasers behave when they buy certain kinds of workers (franchisees, large firm lawyers) whose insecurities can be profitably exploited, that's the key to a general theory of human behavior?
- Neither of these conclusions follows in any way from the
- premises
- they're just asserted without more. The casualness of the reasoning is stunning. Perhaps we have a higher standard of intellectual effort here than they have in "Deals"? At any rate, solecism on this scale requires radical revision.
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> | In the present time, when confusion and outrage are present in the public debate, some consideration to our past experiences could help us to realize that this crisis, besides its particular features and causes, is a new expression of something really old. Therefore, looking at history, we might suggest that liberal capitalism is not dead, but probably will take a long nap. |
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