Sunday, October 26, 2008

Et ne nos inducas in tentationem

This is one of the most prophetic strophes of Our Lord's prayer that clearly explains why free markets without central regulation don't 'always' work. '...And lead us not to temptation'.

Best proof of the argument is the fact that normal businesses run under totalitarian regimes... like the Kremlin ran the Soviet Union in the Stalinist years. Hierarchically and with most of the power and authority concentrated at the levels of Board Chairmen and CEOs and from time to time in the hands of the (usually puppet) BODs.

Most insiders claim that business life is always 'at war', therefore absolute authority at the top is justified by the fact that also generals at war act under similar conditions of authority and do not usually subject their decisions and deeds to a democratic vote by lower ranks. They just decide and act! Eventually they enjoy the glory of victor or parish defeated and doomed. The Military are not and cannot be run like free democracies.

I was interviewing someone from a client's accounting department years ago (I forget who he was or even for which company I was doing the consulting assignment) when at a certain point he mentioned emphatically the strophe from St-Matthew's gospel. In so many occasions ever since I have been thinking of that moment with that dude proving true over and over.

The latest opportunity for proof of the argument comes from the recent debate whether the Libertarian Republicans in the US all of a sudden became Socialists and support Government intervention as far as to the Antichrist concept of Nationalization.

Problem is, when all is normal, with the fear index in the 20ies, fluctuations are minimal and companies are measured by their fundamentals, information is transparent (you wish) and the markets regulate and correct themselves without 'help' from the government*, even in times of 'irrational exuberance' (don't forget Mr. G.).

When war breaks out though and everyone is running for his/her life, all the assumptions about rational behavior of market players fall into the ocean. Then it becomes a stride of instincts. The flocks spread in all directions like when riot police squads charge upon assemblies of amateur demonstrators. 'Women and children first' becomes an instant myth. Everyone runs for his ass. Panic and chaos become the main rule. The 'butterfly effect' then becomes the dominant law of nature. And Big G. (not Ali, but Alan) gets flabbergasted and states 'I am shocked to find out how the world really works!'

It's unfortunate that Economics theories have not yet advanced to equivalent levels that our science progressed in the knowledge of the nature that surrounds us. In physics for instance scientists are often more interested about what happens on the boundaries of 'normal' than what happens under 'normal'. If you translate that into the theory of Economics then you'll find that most of the free market models assume rationality in the decision making process of individual market players. They forget the fundamental premise that all those players are human and humans act emotionally and instinctively most of their adult lives. Leave some laws regulating social behavior unenforced and it's a jungle out there where the fittest and strongest survive. Problem is, you can't easily model 'emotional behavioral' within an economics theory in practical ways that work.

St-Matthew knew better. Even under the noblest conditions in the raising of an individual, under the best education to learn to live by the good and avoid evil, even under the Socratean claim that all of us are born 'good'... when or if we suddenly find ourselves under conditions where nobody watches us, or when we are properly covered by the applicable law, we'll go and grab more than necessary and deal for our own selfish good first and foremost than for anybody else's. I have seen this fact proven true over and over. Humans are made to be living within the boundaries of regulation. Especially, the most powerful among humans are the most dangerous. While most of us are herds of sheep, there will always be hyena's and wolfes and herd dogs chasing our ass and taking advantage.

So? Free markets? Yes, but...

The Greeks have an expression that rhymes even in English: Are you about to make a Turk a friend? Keep a large stick close to your hand...

If you know what I mean...

* Ronald Reagan sez... Two worst sentences you don't wanna hear in your life: We are from Government and We are here to help yeah!

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