The scandal beneath the financial crisis: getting a view from a moral-cultural mental model.

• Author: Jackson, Kevin T.

"We have met the enemy, and he is us."

--Walt Kelly

INTRODUCTION I. RECEIVED VIEW OF THE FINANCIAL CRISIS A. What Happened and Why? B. What Regulatory Responses Are Called For? C. Taking Another Perspective, and Posing a Further Question II. CRITICAL EXEGESIS OF MENTAL MODELS A. Mental Model of the Economist B. Business Management Mental Model C. Mental Model of Lawmakers and Legal Authorities D. Moral-Cultural Mental Model 1. Moral Virtue 2. Human Dignity 3. The Common Good III. MORAL-CULTURAL DYSFUNCTIONS INDICATED BY THE CRISIS THAT ARE NOT TREATABLE BY LEGAL REGULATION A. Post-Modernism B. Rise in Speculative Culture C. Egoistic Individualism IV. SAFEGUARDING MARKET ECOLOGY A. Moral Coordination 1. Adam Smith 2. Friedrich Hayek B. No Bailout for Loss of Reputational and Social Capital CONCLUSION INTRODUCTION

When diagnosing the financial crisis one should take care in framing the terms of discourse. Ever since the signs of economic collapse began appearing, it has been commonplace for pundits as well as the general public to call the fiscal meltdown a "crisis," a term that conveniently carries no ascription of moral disapprobation. Yet after one has reckoned the extensive list of both personal and corporate malfeasances that have played a significant role in precipitating the financial turmoil and paid heed to the underlying moral-cultural factors accompanying the wrongdoing, a more apt description would be "scandal," a term that implies some degree of moral-cultural failure.

This is not idle quibbling over terminology. Most people would agree that it is of critical importance whether an economic downturn is branded a "recession" or a "depression." There are significant political consequences of using one term or the other. Similarly, it matters whether we characterize the global financial imbroglio in amoral (scientific) or moral (human-oriented) terms. It matters whether we approach the crisis with the attitude that we can understand it simply by looking at economists' equations and statistical analyses, annexed to business managers' technocratic jargon, or, instead, we decide that by looking beyond these mental models to the broader realm of moral and intellectual culture we can achieve a more satisfactory understanding.

Looking at the financial scandal from a moral-cultural frame of reference reveals a moral-cultural malaise, and it matters how we respond to this condition. (1) Do we acquiesce to legislators' attempts to promulgate new laws and regulations? This response is common, but it ultimately cedes responsibility for solving the dysfunctions behind the crisis to legal authorities. This Article argues that this approach is inadequate. We would do better to act as if the crumbling of the current economic edifice is a massive chastening, with a call for deepened moral reflection and reform. We ultimately have no one but ourselves to blame for this economic collapse, and there is no one else to whom we can look to chart a new course to prosperity. (2)

The use of the amoral word "crisis" to characterize the meltdown likely flows from an ingrained habit of viewing the world of business in general, and financial markets in particular, as if they operated according to the same kind of mechanistic, determined, and repeatable behavior, like the chemical reactions that scientists study in the laboratory. Those disposed to explain market phenomena with a positivist mindset, who see the business of business as business, in some cases reduce both the symptoms of and the cure for today's credit malaise to mathematical equations. (3) Sometimes they diagnose the problem in squarely scientific, even medical terms, (4) as evidenced by the quick $700 billion and $2.3 trillion prescriptions of government leaders in the United States and Europe respectively. (5) In line with such viewpoints, we have heard many talk of how the economic meltdown was precipitated by a falling real estate market, the product of recurring bubbles that appear every ten or twenty years. (6) According to this account, fundamental dynamics in housing and property markets lead to speculative bubbles that inevitably bring financial systems down with them--no matter what kinds of systems they are--because financial systems are heavily involved in mortgage lending. Even those systems that do not have substantial securitization and are not dominated by private banks are susceptible to those trends. (7) But using the reductive mathematical and scientific explanations of some economists and business theorists to account for the present financial crisis may turn out to be as serious a delusion as the false belief peddled by the current administration that government bailouts, coupled with the geyser of regulations that has been gushing from congressional committees, can fix it.

This Article argues that, although it is necessary to ground any meaningful discussion of the financial crisis in the received views of economists, business managers, and legal experts, gaining a deeper understanding of the current financial predicament requires that one advance beyond the mental models upon which such viewpoints are based and adopt the perspective of a moral-cultural mental model (MCMM) as well. Indeed, such a vantage point is essential for discerning the lessons for enlightened business leadership going forward. From an MCMM point of view, several causes of the present economic crisis, particularly financial innovation and complexity, excessive executive compensation, and neglect of moral hazard, are seen to be rooted in deep-seated moral-cultural tendencies. Most notable among these are technocratic and dehumanized economic thinking, egoistic individualism, greed, short-termism, rejection of objective moral values, and a highly speculative culture.

These underlying moral-cultural trends cannot be resisted or reversed simply by increased law and regulation. Instead, they must be addressed by more nuanced ethical thinking and collective activity grounded in virtue, regard for the common good, and respect for the long-term preservation of market ecology, as well as by paying greater attention to the cultivation of intangible capital assets such as reputational and social capital. Our thinking needs to be more sensitive to the complexity of the relationship between ethics and economics and more attuned to the importance of trust, truth, and transparency. We must also establish localized and spontaneous social structures that are better equipped to foster such elements in business conduct than stepped-up regulation ever could.

Part I presents a brief account of the emergence of the financial crisis, drawing upon the received views of leading economists, businesspersons, and legal experts. Part II first offers a critical exegesis of the three chief conceptual models that have framed these received reactions to the calamity: the paradigms of economics, business management, and legal regulation. Second, it argues that in light of the limitations of these three mental models, an alternative moral mental model is of particular importance. Third, it distinguishes a natural law oriented moral framework, based on virtue, dignity, and the common good, from mainstream "business ethics" frameworks. Current business ethics models are deficient for these reasons. First, they tend to be based on the idea that if it is not illegal it is acceptable. Second, they fail to seriously engage moral right and wrong because of their immersion in moral relativism. Third, they are dominated by window dressing, political-correctness, and anti-business agendas. Part III identifies the existence of a moral-cultural malaise lurking beneath the financial crisis. This general condition is characterized by a postmodern moral relativism and rejection of traditional values (both economic and moral), a rise in speculative culture, and egoistic individualism. Moral reform focused on virtue, dignity, and the common good, rather than legal regulation, is the appropriate response to these factors. Part IV introduces the concept of "market ecology," and relates it to the idea of the common good. I highlight a number of key moral malfeasances connected to the financial crisis to illustrate the harm such practices inflict on the ecology of the market so conceived. This Article concludes that, instead of looking only to the adoption of new legal regulations, visionary corporate governance ought to take greater cognizance of cultivating virtuous, dignity-respecting behavior directed at the common good, which will create favorable background moral conditions for sustaining the ecology of the market.

1. RECEIVED VIEW OF THE FINANCIAL CRISIS

   Looking at the economic crisis prompts some important questions: What happened? Why did it happen? What sorts of regulatory responses are called for? This Part will provide a brief sketch of widely recognized responses to these questions and will proceed in the terms of the conventional discourse of economists and legal experts.

   We live in a world of mental models. (8) To oversimplify for the sake of illustration, we could say that the mental model of the economist inclines him to look for mathematical formulas. Similarly, the mental model of the business management theorist leads him to seek causal scientific explanations. The mental model of the legal expert inclines him to suggest new laws and policies to "fix" the problem at hand. We have heard a lot of discussion about the financial crisis from each of these respective models. This Part will briefly summarize the distinctive ways in which these mental models have framed the financial crisis. (9)

   1. What Happened and Why?

      Leading economists and business writers have asserted that the recent financial meltdown represents the most severe economic downturn since the Great Depression. (10) The crisis has had global consequences: collapses of major businesses, sizeable reductions in personal wealth...