RE: The Financial Crisis 2. March 2009.
Excepts from Chapters 2 ("Language and Its Distortions") and chapter 20 ("The Realm of Economy: A Search for Wealth") in Hans L Zetterberg's forthcoming book The Many-Splendored Society.
Semiotics is a hundred year old science of signs. In America it is linked to the work by the philosopher Charles S. Peirce (1903, 1992/98). In Europe it has had great intellectual victories in Copenhagen under Louis Hjelmslev and in Paris under Agidas Julien Greimas. The latter invented a basic tool called the Semiotic Square (Greimas 1966). It is based on the idea that signs have no meaning in themselves but get meanings through their relationships, as Hjelmslev said, or their differences, as the pioneering Swiss linguist, Ferdinand de Saussure (1916) earlier had put it.
Greimas' starting point are any opposite concepts found in language such as truth vs. untruth, life vs. death, good vs. evil, in short, anything that can fit the "S1 versus ~S1" formulae. He added contrary notions and complementary notions and placed all four signs in the corner of a square as in Figure 2.1. If we take the opposites of femininity versus masculinity, and place them into a semiotic square we obtain a pay-off in the form of two new concepts "the bisexual" (S1+ ~S2) and "the asexual" (~S1+S2) in addition to the original ones, "femininity" and "masculinity".
This exercise reminds us of the bi-sexual person who is both masculine and feminine, and of the a-sexual one who is neither masculine, nor feminine. One can use Greimas' Semiotic Square to make innovations or explications in social reality, for example, to provide a normative environment with a place for a-sexual and bi-sexual persons.
Sociologists may take notice that the fourfold tables — found in abundance in their writings — contain less information than semiotic squares. Market researchers and product developers show the way here for a more constructive social science than the one based on fourfold tables; they use semiotic squares to find out cornerstones of markets and to explore whether or not the possibilities of consumer goods are exhausted. To quote one: "Innovations often come about through the fusion of opposites or on the negation poles. To name but one example: water is the opposite of perfume, but all the "waters“ such as "Eau de Kenzo“ or "Eau de Rochas“ which were developed in the category of light perfume as followers to "4711-Kölnisch Wasser“ are non-perfume/perfume," says the French market analyst Christine Woesler Panafiey (2007).
To learn about wealth let us place the concept in a semiotic square along with its opposite, poverty, and its degeneration into swindling and miserness.
Let us first consider wealth and its measure in the form of money.
Wealth and poverty are opposed. Both can be expressed in absolute or relative terms. To have exactly a million dollar in 2006 makes you just so rich in absolute terms. In relative terms you are then one of 8.3 million dollar millionaires in the United States. In this case there are 2.8 percent of the population in the United States who are richer than you. If the number of millionaires decreases or increases your relative wealth becomes greater or smaller, but your absolute wealth stays the same. Likewise, if you move to a poor country with your million dollars, you become a much richer person in that country than in your American home country. A person or a group of persons may become richer in absolute terms but poorer in relative terms. Or poorer in absolute terms but richer in relative terms. The failure to specify which kind of wealth and poverty we are talking about has caused confusion and needless acrimony.
Most people see riches as the number of rooms you have in a house, the size and make of your car, the content of your jewelry box, and the elaboration of you dinner menu, the quality of the services you enjoy, and other visible matters. But technically speaking, wealth are not things or services but the evaluation of them. In any advanced society wealth is evaluated in money, and money is measured by a currency scale.
A currency scale has equal and interchangeable units; a dollar is a dollar at the low end of the scale and at the high end of the scale. And there is a fixed zero-point; it shows that someone has no dollar to his name or that a firm has no cash and assets of its own left, i.e. is bankrupt. No scale of honor is so precise.
No other realm in today's society has scales of its cardinal values with zero-points and equal and interchangeable values. In the body politic there are approximate quantitative measures of power according to the number of votes for a politician and his party in elections. In science there are the count of the number citations received by a professor and his laboratory in scientific journals. However, political power and scientific competence also have other sources than popular votes and citations; here ratings must be supplemented by "good judgments" of those in the know. In the economy, by contrast, you can establish the net worth of an individual or organization and express it in a currency; you need no other information. In the case of firms, quarterly and annual balance sheets, certified by accountants, do the job. This is an obvious advantage for the economy in the ever present competition between different realms in society.
Economic evaluations are expressed in symbols that can be treated in arithmetic operations by producers, tradesmen, and consumers, and also by more advanced mathematic in finance. This fact has lent a special aura to the economic realm in society that is not necessarily commensurate with its relative contribution to the rest of society, its body politic, art, science, religion, morality, family life and voluntary associations.
Poverty as we have come to perceive it, say, in large parts of Africa and on the Indian subcontinent of Asia, has been the normal state of mankind throughout its entire history. Wealth have been very spotty and found along some fertile river valleys, trading cities, royal courts, and aristocratic mansions. The eradication of poverty on a larger scale has a history of only some 200 or 300 years.
As part of its millennium goals for mankind the United Nations expressed that the number of poor be reduced by half by the year 2015. All member countries and all the world’s leading development institutions agreed on this goal. Living under one dollar a day was used to define poverty. This is an absolute measure, but ambiguous; the dollar fluctuates in purchasing power, and the definition of the poverty level must in principle be adjusted every year.
Poverty, like wealth, is expressed either in absolute or relative terms. Paucity may be reduced from one year to another in absolute terms, but increased in relative terms. Relative poverty depends on the rest of the income distribution. To measure poverty in relative terms you may ask for the percentage of total wealth that is possessed by the lowest ten (or some other low number) percentiles of the population. The United Nations did not declare any goal for the reduction of relative poverty in the world.
The world average of absolute poverty is being reduced at a rapid rate, not because any UN directive, but because institutions of private property, rule of law, and freedom of trade has allowed entrepreneurs grow in number, hire many, and pay wages high enough to raise entire households over the poverty level. At the time of this writing, it is primarily due to China's rapid development that the world figure on reduced poverty shines.
Looking to the left side of the semiotic square of wealth we meet misers. The typical miser hoards gold and other symbols of rich and does not spend money on investments or charities. Misers are stingy also when it comes to buying comfort for themselves. They do not want to reveal that they are wealthy.
It is not illegal to be a miser. Morality rather than law is invoked to cope with miserliness. But the moral message is mixed. Many moral doctrines actually say that it is better to save money than to spend it. But are hoarders of money actually nobler than spendthrifts? On a personal level they may or may not be. But on the societal level they are not superior according to the rationality of economics. A nation of misers is not conducive to economic growth. Too many trades that add to wealth are simply left undone. People do not notice businesses that do not start so we never know the damage done by misers.
Moral doctrines that affect misers hold that you must share your wealth with the poor. Dickens' master miser, Ebenezer Scrooge, is rewarded with happiness when he finally does so. However, there are also moral arguments to the effect that providing workfare is better than providing welfare in the form of the dole. A job gives a person new social encounters at the workplace. It gives discipline to the individual. It gives taxes to the body politic, something appreciated by politicians. Public welfare carries big costs for the body politic. But welfare legislation gives its promoters among democratically elected politicians many votes.
Philanthropy is not the same as charity. Charity is giving to people who are without food, clothing, shelter and the other necessities of life. Philanthropy is giving donations to projects and institutions within the areas of culture, science, religions, health, and others that lack sufficient sources of revenue from taxes or sales. Philanthropists can be private citizens, non-profit organizations, companies, or foundations. Individuals may donate their time as well as money. Their names may appear on bronze plaques in buildings, on a page in a theater or concert programs, in the title of a professor’s chair, in the Foreword to a technical book, next to an exhibition in a museum. Foundations are the most sophisticated forms of modern philanthropy.
Tax legislation is decisive to philanthropy. In the United States at the time of this writing, a philanthropic foundation must give five percent of its total resources (capital, interest, dividends, and capital gains) annually according to its charter, or, send this money to the tax authorities. Interviews carried out among the many private individuals in New York who are philanthropists (Ostrower 1995) included a question as to whether the deduction for contributions should be eliminated and let the state use the additional tax revenues for the philanthropic projects. One of the respondents answered “If I wanted this I would move to Sweden."
Any country sensitive to the detailed needs of its population should have legislation that encourages and facilitates philanthropy. Ministers for culture, research, health, and education may assume omnipotence and promote the idea that they, themselves, can meet all needs of their society through political channels. Surely they can do much, but they don’t have information of all that has to be done. There is always room for private philanthropy.
Looking to the right side of the semiotic square of wealth we meet economic swindlers who engage in deceptions for personal gain. The oldest form is the use of counterfeit money. In a typical modern con game the swindler is not as rich as he (or she) pretends, and the presumed wealth is used to draw those who are richer into schemes that transfers their money to the swindler. F. Scott Fitzgerald novels The Great Gatsby and This Side of Paradise revealed swindling and questionable identities on more than a petty scale.
Max Weber rules out personal greed as useful in the definition of capitalism:
‘Acquisitiveness’, ‘striving for profit’ — for profit in terms of money, for the largest possible pecuniary gain — have, as such, nothing at all to do with capitalism. This endeavour has existed and exists in waiters, doctors, coachmen, artists, prostitutes, corrupt officials, soldiers, brigands, crusaders, gamblers, beggars, indeed one might say in all sorts and conditions of men, during all periods in all countries of the world in which the objective opportunity to do so has been or is in some way available. It is part of the ABC of cultural history that one should, once and for all, refrain from this naive definition of concepts. Unfettered acquisitiveness is in no way tantamount to capitalism, and even less with its ‘spirit’. Capitalism may quite simply be synonymous with the subjugating or at least the rational tempering of this irrational instinct. But capitalism is indeed tantamount to the quest for profit — in continuous, rational capitalist business operations; for constantly renewed profit; for remunerativeness — since this must be so. Within a capitalist order that embraces the whole economy, an individual capitalist company would be doomed to failure if it did not orient itself according to the chances of achieving remunerativeness. (Weber 1922/1986, p. 31)
Personal greed may not be the motor of capitalism, but it is the source of corruption in capitalism, as it is in other systems. The long version of the tenth commandment reads: "You shall not covet your neighbor’s house; you shall not covet your neighbor’s wife, or male or female slave, or ox, or donkey, or anything that belongs to your neighbor." If it had been written in capitalist times it would have included another clause: "You shall not covet the cash flow of your employer, or his suppliers, or his customers." Top management of other people's factories, offices, wealth, and assets are the new robber barons. In the first half of the twentieth century they began to replace owners as day-to-day leaders of firms (Berle & Means 1933). In the second half of the century they formed the majority of most corporate boards. This made for professional governance by graduates of business schools. It also paved the way to the practice of non-owners to give fanciful "compensation packages" to each other.
To covet the cash flow of one's employer is an ever present temptation to enrich oneself, for all employees to be sure, but particularly for modern management.With the advent of money documented only in computerized accounts, economic swindling of big corporations and government institutions has become easier for the technically proficient. The possibility to have inappropriate transactions outside of balance sheets without mentioning them in footnotes — sometimes in collusion with accountants — provides a golden opportunity for high-level corporate swindlers. By a process of institutional evasion of norms, questionable transfers of funds of business owners to managers have become next-to-normal in the business elite.
The borderline between sophisticated banking and swindles became blurred when firms on Wall Street invented a combination of "derivatives," "securitization," and "off-balance-sheet accounting with special purpose entities".
Anything that has reasonably regular payments — installment debts on credit cards, mortgages, car loans, aircraft leases, toll payments at super-highways, music royalties — has long been used as collateral for a an advance in the form of a loan. An innovation is to make such transactions by securitization. A trust is set up by a bank to receive the money from such collections. The trust issues bonds and pays bondholders interest, and at the appointed time, the principal. So far so good. Combinations of mortgages from different districts and from home owners with different credit ratings can be combined and packed as a "derivative" and also sold as a bond. In this "securitization" obfuscation may have started; the risk and value of such bonds is in principle calculable but in practice difficult to calculate. Perhaps the swindle is simply an assertion to the buyer that there always will be a market and a fair price for such securities.
The trust, or what remains of it after initial sales of any bonds, may get off the books of the bank by including it in a so-called special-purpose entity, preferably incorporated in a low-tax place such as the Bermudas or Cayman Islands. With this innovation in off-balance sheet accounting, the bank no longer encroaches its capital requirement for further lending. The bank merely books profits from such lending transactions. It does not have the normal costs for increasing its base of own capital when lending more, nor the risks of defaults in the stream of payments from credit cards, mortgages, or whatever was included in the trust. But the main problem with these schools is wider.
Is securitization of derivatives combined with off-balance sheet accounting a swindle or just financial inventiveness? Joseph Stiglitz, professor of economics at Columbia University, had his view formulated at the beginning of the bank crash of 2008 when on October 21 he told a congressional committee, that this "securitization was based on the premise that a fool was born every minute. Globalization meant that there was a global landscape on which they could search for those fools — and they found them everywhere."
Most of these fools born every minute have birth certificates in the form of MBA-degrees from business schools. After the turn of the century there has emerged an unfortunate, Harvard-inspired conformity in curriculum and attitudes of the business schools and their student bodies. Business school graduates the world over were given unrealistic birth rights to expect excessive compensation packages.
The MBA-degree should be considered de-meriting until the business schools learn, not only to better separate swindling from wealth creation, but learn to better see business and economy as a part of a total society in which other societal realms are their equals. To get rich is not something superior to the holding of political office, to have scholarly competence, to create art, or to let sacredness or virtue accompany the course of every-day living.
It is essential that board members of financial institutions stand above the MBAs that report to the board. Boards should include someone knowledgeable in history who can see when old stupidities are revived. A board ought to have a member or two who understand politics to the extent that they can grasp the consequences of misguided bipartisan efforts to promote home ownership. Corporate boards may have use for some skeptic from social science or journalism or preferably from the school of hard knocks, who can reveal argumentation that is more persuasive than sound. Also, a good board needs members who are totally unimpressed by well-known firms or persons that have made much money on upticks and therefore think that they are competent to handle any business situation. Consider also in recruitments to board what difference ethically responsible people can make to the quality of board decisions, be these persons morally gifted by nature, or persons who have struggled enough with issues of honor to become moral virtuosos. And imagine what difference it would have made during the build up to the 2008 financial crisis to have had a board member with enough scientific and mathematical skill to analyze a derivative equation and put reports and promises by MBA-salesmen from Lehman Brothers to task.
See
http://www.zetterberg.org/InProgrs/The_Many-Splendored_Society/b_Bibliog.htm
I am grateful to Anita du Rietz who persuaded me to write "wealth"
instead of "riches" that I originally used in this text, and to Rune Banerus who
called my attention to the role of the MBAs in decisions by corporate boards
during the build up to the financial crisis in 2008-09.Note