Money Creation (1) - Money Multiplier, Loanable Funds, and True Constraints on Money Creation

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Wrong - the Money Multiplier

The preponderant,  yet false, representation of how money is created relies on the so-called money multiplier. The idea here is that banks' ability to create money depends on (a) the supply of deposits it receives from customers and (b) the percentage of these loans that must be kept as reserves at the central bank: Say, a bank A has received a deposit from a customer to the tune of $ 100, and the reserve requirement is 20% (of the deposit). Thus, the bank must keep a reserve of $ 20 at the central bank.

The bank is allowed to loan out the remainder, $ 80. So, from a deposit base of $ 100, the bank has created $ 80 of new money. The loan is fully used by the creditor to pay for a house and thus ends up as a deposit by the house-builder, in another bank B. This bank has now a deposit base of $ 80, of which it must keep 20% (= $ 16) as reserves at the central bank. However, the bank is free to loan out $ 64 (= $80 - $ 16). 

This process goes on until the deposit base is used up. In the present example, the total amount of money that banks can create through this multiplier effect is $ 100 / 0.2 = $ 500.

If the reserve requirement were 40% , the amount of money newly created by the banks would be only $ 100 / 0.4 = $250. In other words,  the lower (higher) the reserve ratio, the larger (smaller) the addition to the money supply created by the banks.

Wrong - Loanable Funds Theory

Unlike many textbooks would have it, it is not true that banks depend on deposits to be able to make loans. It is not the case that first a deposit must be established so that a bank is able to make loan, effectively passing (part of the) deposit on to another client in the form of a loan. Yet, this is the fundamental assumption of the theory of loanable funds.

The truth of the matter is that Banks can create loans, and thus new money, literally out of thin air.

True - Constraints on Banks' Ability to Create New Money

In doing so, of course, the banks still do face a number of constraints that will induce them not to produce money ad libitum.

Most importantly, operating in a competitive environment, banks need to make sure that lending is a profitable operation - the profitability constraint. Any factor compromising this objective will cause banks to adjust lending appropriately. If they fail to show this kind of commercial prudence, there are still regulatory constraints intended to keep banks on a viable course. Also banks, need to take into account credit risk - the risk of loans to default - and liquidity risk - the risk of not being able to honour liabilities due to a momentary lack of funds. Ultimately, credit risk and liquidity risk are subsumed under the profitability constraint, as overwhelming loan defaults and insolvency terminate the ability of a bank to be profitable.

To be continued in Money Creation (2)

What's Wrong with the Euro? (4)

Image credit. Continued from What's Wrong with the Euro (3)

Here is an alternative explanation of the European crisis, and, indeed, manifestations of that crisis all over the world.

Private Debt Is Driving the Crisis

We assume two factors to be the central indicators of economic activity: total demand and income.

Total demand and income are driven 

• by turnover of the existing money,

• by new money created by new private debt.

Private banks are by far the most ample source of changes in the money supply. In the UK, it is estimated that 97% of all money is created by the extension of private debt by private banks.

Also, existing money is relatively stable, whereas changes in new money can be rather volatile. 

Research provided by Steven Keen suggests that (the rate of change) in private debt determines employment: when private debt increases, money is available to fund economic projects that require additional labour input. When private debt declines, so does investment and hence employment.

Also, it transpires that unemployment is driving government spending, with the latter rising to handle higher unemployment, and falling when unemployment declines again.

Thus suggests that targeting government debt is targeting a symptom rather than the cause, which is a fall in (the rate of change of) private debt.

Responsive government spending (in addition to its being driven by unemployment) is called for, according to Keen, and has, indeed, helped to cushion the economy's crash in the US. Government spending resulted in slower deleveraging, helped avoid bankruptcies and encouraged people to resume debt financing. In Europe, countries prevented from responsive government spending had to suffer a more draconian and more enduring period of hardship.

Why Is Germany Different?

In Germany, private debt was on a falling trend for quite some time before the crisis hit. But then the question is, what was financing German employment if neither private debt nor government spending did it (preponderantly) ? 

The answer is: exports. Germany was running a trade balance of 7.5% of GDP, which is far higher than the government deficit allowed by the Maastricht treaty. 

Notably, looking at German statistics, there is no correlation whatsoever between government debt change and unemployment. The money that is financing employment is provided by earnings from exports, not by what is accomplished domestically. The money supply was growing despite a falling (rate of change of) private debt. Also, there was no housing bubble owing to a stable culture of house renting, based on low rents and a strong and safe status of renters vis-à-vis landlords.

What's Wrong with the Euro? (3)

Image credit. Continued from What's Wrong with the Euro? (2)

 The Euro's Design Error

According to Wynne Godley (see his Maastricht and All That), the fundamental error in the design of the Euro consists in the assumption that economies are self-adjusting:

As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed.  But this could only be correct if modern economies were self-adjusting system that didn't need any management at all ...

Source. Time mark 33:27

To Godley, it stands to reason that a system that is not self-adjusting and provides no means of adjustment is destined to end up in crisis. The additional constraints established in the Maastricht treaty ensure furthermore that the EU-construction is going to exacerbate the inevitable crises.

Writes Wynne Godley,

... the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. 

If a country gives up or loses this power, it acquires the status of a local authority or colony. Local authorities and regions obviously cannot devalue. 

But they also lose the power to finance deficits through money creation while other methods of raising finance are subject to central regulation. Nor can they change interest rates. 

As local authorities possess none of the instruments of macro-economic policy, their political choice is confined to relatively minor matters of emphasis – a bit more education here, a bit less infrastructure there. 

I think that when Jacques Delors lays new emphasis on the principle of ‘subsidiarity’, he is really only telling us we will be allowed to make decisions about a larger number of relatively unimportant matters than we might previously have supposed. Perhaps he will let us have curly cucumbers after all. Big deal!

Source.

So far the inherently faulty design of the Euro and the inevitable consequence of creating endogenous shocks and exacerbating external shocks. Now let us turn to the causes of the crisis.

Causes of the Crisis

The official line identifies excessive government deficits as the cause of the crisis, recommending debt reduction as the appropriate remedy. In particular, Germany's Finanzminister Schäuble argued that erroneous bond pricing had given rise to the crisis. When the Euro was introduced such faulty pricing had brought about a convergence of prices of bonds from economically highly divergent economies. The crisis was triggered by a crisis of confidence, whereby it was suddenly discovered that certain countries were not as competitive as suggested by the low yields of their government bonds. Upon this realisation, they were radically repriced, soaring from yield levels close to those of German government bonds (2%) to 18% and more. Structural reforms (deregulating labour markets, privatisation of public institutions, reducing public debt etc.), rather than more public spending were seen as the correct way to solve the problem. In sum: it was a European crisis with causes specific to Europe, and the need to reduce government debt being the major avenue for redress.

Interestingly, the only country to consistently comply with the Maastricht criteria was Spain, while Germany was among the violators; but Spain's economic performance was abysmal, while Germany did very well.

Reducing government debt may actually lead to a rising debt/GDP ratio, if there is a positive contribution of debt to GDP growth, and GDP falls faster than government debt.

By contrast, there is an argument suggesting that there was a worldwide common feature of the crisis.

To be continued in What's Wrong with the Euro? (4)

What's Wrong with the Euro? (2)

Image credit. Continued from What's Wrong with the Euro? (1)

 

Absence of the Fiscal Dimension

... and to establish an economic and monetary union, including ... a single and stable currency.

This is the declared goal of the Maastricht treaty.

What is signally missing in the first part of the sentence, is the term "fiscal." If unification is desired, there is also a need for a shared treasury, the capacity for a uniform fiscal policy regime; in other worlds: something akin to the unified tax and fiscal system in a sovereign state.

Basis of Maastricht Treaty - An Anti-Fiscal Economic Philosophy

With a preponderant desire to keep government deficits as low as possible, the Maastricht treaty expresses a clear preference in terms of economic philosophy. This is reflected in the rules of the EU that aim at reducing the discretion and extent to which individual member states could engage in fiscal policy. Government deficits are viewed as the major source of economic problems.

Hence, the prominent position of the 3% (of GDP) ceiling for government deficits enshrined in the treaty.

Hence, the prominent position of the 60% (of GDP) ceiling for cumulative government debt in the Maastricht treaty.

Steve Keen summarises in his words what he considers the ideological core of the EU's anti-fiscal economic ideology codified in the Maastricht treaty:

If government spending is constrained and price stability is achieved, then economic stability will be assured.

Source, time-mark 15:04

Repressive Implications

On the basis of these key restrictions, Brussels imposes controls and fines on national governments so that these will adhere to the preferred economic philosophy of the Maastricht treaty. In the case of Greece, this regime has led to a situation where the country entirely lost its sovereignty, having to submit virtually all important government decisions for approval by the EU.

An Economic Scheme Imposing Ideological Uniformity on Europe

Apart from the non-trivial economic consequences of enforcing this philosophy, it is remarkable in its own right that we find at the core of the EU the desire to subject the entire continent to one school of thought.

Political Motive for the Euro - Pacifying the Pacified

The EU was a political project intended to make impossible any chances of wars among European countries, especially between France and Germany, by tying the respective countries so close to one another that military conflict would be entirely out of the question.

It is odd that a region as fully pacified as postwar Europe would still be considered in need of a pacification process of the scale established by the Maastricht treaty.

Also, it is ironic that the redundant pacification project would actually abet a return of palpable reasons for serious animosities among its member states.

It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.

Milton Friedman quoted by Steven Keen at time mark 17:19

Insufficient Adjustment Mechanisms

A country whose regions are differentially affected by an external shock (like the oil crises) has three possibilities to react to it by (1) migration of people and goods, (2) by fiscal transfers, and by (3) adjusting wages and prices. Take Texas during the oil crises of the 1970s. The upheaval benefited Texas tremendously, like other oil producing Sunbelt states, while other parts of the US where negatively affected by the surging oil price. People and goods would move from the afflicted areas to the booming ones. Or else, offsetting financial flows from the national to the state and local level would help cope with the differential. Finally, wages and prices would readjust, for instance, so as to attract industry to the lower cost areas (or to boost tourism in Greece owing to lower wages for people working in Greek tourism, resulting in lower cost of holiday in Greece).

However, compared to the US,

wages and prices in Europe are more rigid, and labour less mobile. In those circumstances, flexible exchange rates provide an extremely useful adjustment mechanism.

Time mark 22:34

Yet, no such "extremely useful adjustment mechanism" is available to the member states of the EU.

It is quite telling just how small the fiscal centre of the EU is. The debt of the EU authorities ("Brussels") as a percentage of European GDP is about 1%, which contrasts with levels of government debt in sovereign countries like the USA of between 50% to 90%.

The budgets of the states in the USA are very small, while the national budget is enormous. In Europe, we have the converse with the "national" budget being minute compared to the national budgets.

With a fiscal sovereign in place, regional shocks can be offset by redirecting resources from the better off regions, so that rising taxes and falling welfare spending in one part of the country can be used to compensate lower taxes and ensure higher welfare spending in another. There is no fiscal sovereign in Europe that could accomplish such balancing.

Setting Up Endogenous Shocks

Obviously, with in Euroland there are free flows of goods as well as private finance between countries. If an imbalance builds up, like Greece importing far more goods from germany than it exports to that country, the government is unable to

• devalue - it is no longer the currency-issuing sovereign of the money used in its country,

• raise interest rates - it has no authority to determine interest/monetary policy which is a prerogative of the central monetary authority (ECB),

• run government deficits to compensate for the trade deficit.

Under the Euro, the German trade surplus and Spanish and Greek deficits exploded.

Prior to the introduction of the Euro, building up a trade deficit would have triggered countervailing forces, sooner or later. The currency of the country running a trade deficit was liable to devaluation, induced either politically or by markets; a devalued currency would make it more expensive to buy the preferred exports (cars, capital equipment etc.). In the absence of such exchange rate adjustments, people could keep on building up a trade deficit to unprecedented levels.

To be continued in What's Wrong with the Euro? (3)

What's Wrong with the Euro? (1)

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Maastricht Criteria on Government Debt and Annual Government Deficits

On 7 February 1992, the Maastricht Treaty was signed by the Members of the European Community.

Upon its entry into force on 1 November 1993 during the Delors Commission,^[3] it created the European Union and led to the creation of the single European currency, the euro. The Maastricht Treaty has been amended by the treaties of Amsterdam, Nice and Lisbon.

Source.

For a full picture, consult the above source for the 4 Maastricht criteria (concerning inflations rates, exchange rates, and long-term interest rates, while we discuiss in this blog only the fourt criterion: government finance, that is: the double requirements:

• The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. 

• The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year.

Godley's 1992 EU-Compunction

In an article entitled Maastricht and All That published in the London Review of Books, Wynne Godley expresses concern about a momentous design fault underlying the new European currency.

Underlying Godley's worry is the assumption that that a sovereign state has three means of redressing serious economic decline, as manifest in insufficient economic activity and unemployment: it may resort to 

• (a) devaluation (to strengthen competitiveness vis-à-vis hard(er) currency economies) , 

• (b) government spending (to compensate a lack of private spending with public spending), and 

• (c) government borrowing.

The crux of Godley's warning with respect to the EU is that all three mechanisms are either terminated - (a) - or inordinately restricted - (b) and (c) - for the no longer sovereign member states of the EU.

Writes Godley,

If a country or region [engulfed in economic crisis, IGTU] has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.

Source.

A no-longer-sovereign EU member country would indeed to borrow if it wished to spend more than tax revues. However, it's borrowing capacity has been limited to 60% of GDP. At the same time, it is not allowed to increase its deficit by more than 3% per year.

So, unless there are adequate financial transfers from some (sovereign?) agent (the EU?), countries find themselves with their hands haplessly tied in the face of widening economic distress. They cannot devalue, they cannot spend enough, and they cannot borrow enough to augment spending. They are dependent on some agent - presumably the EU - to make up for the shortfalls. 

Expectations of  a Strengthening and Convergence of Economies versus A Record of Decline and Divergence

Unsurprisingly, the EU, with its member countries severely restricted in their ability to adjust to an economic downturn, has shown a poor reaction to the General Financial Crisis (GFC), compared to the USA and the UK, turning it into a localised European Great Depression.

Rather than

mark[ing] a new stage in the process of European integration

Source Steven Keen, Lecture 7: Why the Euro Is Destroying Europe, time-mark 08:25

as the Maastricht treaty had proclaimed, disparities and inequality among the member states have dramatically increased, with Germany doing very well, while France, Italy, and especially Spain and Greece experiencing traumatic economic and social decline and political humiliation.

The "strengthening and convergence of their economies" prognosticated in the Maastricht treaty is turning out to be a weakening and growing divergence of the economies.

Continued in What's Wrong with the Euro? (2)

The Ubiquity of Freedom - Passions and Constraint, by Stephen Holmes

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Waning Relevance of Freedom?

Recently I felt a loss of thrust in my work on liberty.

On reading Passions and Constraint. On the Theory of Liberal Democracy by Stephen Holmes, I have come up with a number of thoughts that may help me re-establish the relevance and urgency of freedom in the public debate.

Contemporary self-proclaiming liberals (of pre-revionist persuasion, i.e pre-Mill) strike me as dogmatic and consequently oblivious to the real history of freedom, including her present manifestations.

Losing Sight of Liberty

In drawing up or implying ideal descriptions of freedom, they tend to ignore the lived experience, the resorption, transformation and resultant present form, the ongoing discourse and modern feel of freedom - thereby neglecting the continuity of primordial liberal ambitions throughout the growth of liberalism that leads to its contemporary forms.

We emphasise the divisions concerning the implications of freedom, rather than the continuity and significant presence of her multicore base in which our political sensitivities are rooted. By fixing our attention on an ideological battlefield, we lose liberty from our vision. We see only pro-market and contra-market, failing to recognise that it is the inter-meshing of liberal values which shapes the reality of market economies, with one party tending to specialise on idealisation, the other on denunciation.

Unrecorded - The Real Unfolding of Freedom

In the main, I encounter classical liberal thinkers through the secondary literature, where freedom is portrayed as being vitally dependent on a consciousness of a certain theoretical representation of her. Freedom is treated as if her secret, the key to her, was contained in the history of ideas, when the latter is just one aspect to consult in one's efforts to appreciate freedom as a hall mark of our civilisation. Characteristically, I know of no history of freedom that is not basically an exercise in the history of ideas. This is astounding, since liberty is perhaps the most fundamental achievement of the modern age. Therefore, one would expect an ample literature recording the real unfolding of liberty in modern societies.

Freedom - An Ideological Sideshow

It seems as if the modern classical liberals do not know freedom when they see her. While the (in many important ways unconsciously liberal) progressives do not care much for liberty because she has become so well established and so splendidly adapted to modern needs that we can operate her like a driver who is largely unaware of conducting the vehicle by her manifold interventions from A to B.

People are interpreting liberty in different ways; and while they are referring to and moulding and remoulding the same basic values of liberalism, liberty is not the theme associated with policy shaping debates but with the obstinate feud of ideological camps that agree on and insist on the broken continuity of freedom.

The Paradox of Freedom

Recently, I was stuck with the paradox of freedom. Freedom has grown and spread comprehensively so as to form the base frame of our society. However, this state of affairs has been brought about and is maintained without the support of powerful, explicitly pro-freedom forces. That is the core of what I refer to as the paradox of freedom.

Anger, Debunking, Disorientation, and Loss of Purpose

In gradually changing my ideological mooring, my energy was first devoted to

• indignation triggered by the dogmatic rigidity of my fellow libertarians, then 

• an ambition to debunk the dogmatic abridgement of freedom, and finally, on a waning course now, 

• the increasing realisation that (a) freedom is on the best terms with the status quo, and (b) that I have little to teach my contemporaries with respect to freedom despite many years of dedicated research into the subject. Freedom is trivial, she happens everyday.

Neither are the modern classically liberal onslaughts against our supposedly wildly anti-liberal society convincing, nor are the ideological boundaries from within which the attacks are launched. ItThe idea creeps up on me that "my" robust conditions of freedom are elastic to such an extent that they hardly suffice to distinguish between rivalrous policy recommendations. Freedom seems not be of great relevance in deciding modern policy controversies.

See also The Age of Liberalism.

Disguised Liberty

But there are new aspects of the contemporary status of liberty. Freedom is strangely disguised today, either because she is intrinsically hard to perceive, which has a parallel in the perception of happiness, as the latter is frequently present when its conditions and presence in one's attunement are imperceptible.

There is at least one more momentous habit of obfuscating obfuscation liberty that seems to have become part of our political culture.

We have become used to stereotypes of liberal conceptions of freedom and a corresponding array of anti-liberal criticisms and denigrations of these. Effectively, we have divided freedom into a liberal interpretation and an anti-liberal denunciation of classical liberalism.

Denial of Continuity

It is hard to say, who is to blame for the split. Perhaps the liberal dogmatists deserve a somewhat larger share of the blame. The reason why is nicely brought out in Holmes' studies of liberalism, whose core insight is that many of the social desiderata and attainments favoured by anti-liberals and denied and rejected by liberals are in truth perfectly compatible with the basic convictions of classical liberals, not only viewed with hindsight, but often also in so far as they are incorporated in the arguments for freedom of the classic authors (Locke, Hume, Smith, Kant etc).

An Exclusive Style of Moral Communication

In discussing modern policy issues we are often using aspects of classical liberalism as points of reference, without being aware of it. That is, there is more classical liberalism included in our most vivid and topical debates. The discussion is still strongly committed to liberal views and values. But we fail to acknowledge the paradigmatic unity that is overarching the deliberations. 

Instead, we overemphasis the revisionist demarcation line, declaring

• this to be classical liberal (and incompatible with progressivism), and  

• that to be progressive (and incompatible with classic liberalism). 

The divisions along these lines concerning specific policies are often specious, in that they really are only interpretations (along the lines of "liberty as method") rather than disagreements that take the contending proponents outside the perimeter of legitimate concepts of freedom.

The way we address freedom in public discourse seems to represent a style of defective or at least one-sided, truncated and in this respect misleading moral communication.

Overambitious Theory

Finally,  I see a correspondence between the problems of a self-contained ethical theory and the decline of classical liberalism. Theoretical ideals - such as consistency or ubiquitous applicability - are given undue precedence over the organic interaction between the conjectures and refutations that we may distil both from theory and practice.

Gray's Liberalism (3) - Premodern Anticipations of Modern Liberalism

Image credit. Continued from John Gray's Liberalism (2)

In assessing traces of liberalism in Ancient Greece, John Gray seems to argue that Benjamin Constant's distinction between ancient and modern freedom is basically sound, at least, to the extent that freedom in Greece was not thought of as an institution to protect personal autonomy, but as a dimension of civic virtue, or in Jerry Miller's terms: civic republicanism. A citizen's freedom entitled him to a voice in collective decision-making. But this right was an expedient furthering a man's ability to serve his polis and the conditions of its thriving: self-rule and the absence of external control.

As I write here:

Freedom is serving the community, freedom is assuming a role, fitting into the community so as to preserve its capacity for harmony.

It is striking that (a truncated, young shoot of) freedom and (widening) political participation emerge as twins. However fragile and short-lived, the ancient Greeks have experimental encounters with the presumably benign effects of open and vivid debate on a community's chances of survival. Ancient freedom is directed at improving the breadth of information from which to draw strategies to strengthen the polis.

Recognising, or at least testing, the usefulness of broad-based deliberation seems to have spearheaded further social hypotheses such as the universal equality of men, and even conjectures relating to the advantages of individual freedom - "germs of liberal ideas among the ancients." (p. 3) Also consider Freedom and Ancient Greece.

Gray quotes G.B. Kerferd:

"The importance of this doctrine of Protagaras [= Protagoras, IGTU] (of political equality) in the history of political thought can hardly be exaggerated [...] Protagaras produced for the first time in human history a theoretical  basis for participatory democracy" - the basis being Protagaras' doctrine that all men have a share (though not the same share) in justice. (p. 4)

These attempts at liberty remain germs, though.

In the works of Plato and Aristotle, we find, not the further development of the liberal outlook ... but instead a reaction against it - an emasculation of Greek liberalism., or a counter-revolution against the open society of Periclean Athens. In the works of Plato and his disciple, Aristotle, the sceptical and empirical outlook of the Sophists and of Democritus is replaced by a species of metaphysical rationalism, and the ethics of freedom and equality are repudiated, radically by Plato and more moderately, but no less consistently, by Aristotle. (p. 4 and 5)

Elements of freedom reappear in ancient Rome:

Among the Romans, the Laws of the Twelve Tables ... embodied important guarantees of individual freedom. The first of the public laws they contain enjoins that 'no privileges or statutes shall be enacted in favour of private persons, to the injury of others contrary to the law common to all citizens and which individuals, no matter of what rank, have a right to make use of'. It was on this basis that there grew up in Rome a highly developed and in many ways strongly individualist private law. This individualist legal tradition decayed in later times, especially under the rule of Justinian and Constantine, but it was influential in modern times through the medium of the Latin Renaissance of the seventeenth century. (p. 6)

And finally John Gray has this to say of Christianity:

[T]he moral inheritance of Christianity to the medieval and early modern periods was complex and even contradictory. While Christianity indeed brought an end to the ancient tradition of freedom of enquiry and comparative religious toleration, at the same time it transmitted to us the universalist and individualist outlook found in several of the religious and philosophical movements of the later Roman period. (p. 7 and 8)

The fate of freedom among the ancients reaffirms later experiences that show that freedom widens its territory concentrically; she is capable of adhering to certain groups and strata of society while not affecting other parts of the population (as in slavery-based Greek and Rome, the Britain of the barons or during the early days of the USA). Freedom is divisible; she is perfectly capable of thriving among the select few.

What were the barriers to liberty's ultimate breakthrough in Greece and Rome, why was she eventually repelled, and under what kind of conditions does she become "ineradicable"? In a word: do the stages of budding liberty tell us more about the conditions of her viability?

What Is Ethics? (2) - Moral Coordination

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Continued from What Is Ethics ? (1)

Morals or morality, on one hand, and ethics, on the other, are etymologically very similar, both terms originally referring to custom, convention, tradition, rite. Nowadays, the term morality comprises the practical enactment of normative constraints on human interaction. By contrast, the word ethics, at least as I use it here, denotes (the largely academic practice of) reasoning about morality. 

Ethics can take two forms, one normative, and the other descriptive. The latter tries to describe and analyse moral phenomena, whereas the former takes a stance in demanding moral rules and practices and offering strategies for justifying them.

Though, other breakdowns of ethics are possible. Thus, ethics may be divided into 

• meta-ethics, studying the the conditions underlying the possibility of studying morals, sharpening our picture of what moral behaviour consists of and what tools we have helping us to reason meaningfully about the good and the bad,

• normative ethics, seeking to discover and defend the values on which moral arguments should rely,

and

• applied ethics, narrowing in on specific issues, such as the ethics of market behaviour, doing justice to the need of becoming competent in a subject-matter if one is to engage in informed and responsible moral reasoning.

Three questions are fundamental and recurrent in the history of ethics:

• What is the highest value / good? (Or: What is the right ranking of values?)

• How to conduct oneself in morally correct fashion?

• What does it mean to state that man is or is not endowed with free will?

I shall deal only with the first of these three questions here, possibly writing about the other two in later posts.

What Is the Highest Value? What Is the Right Ranking of Values?

As a finding of descriptive ethics, on the one hand, responses to this question are hard to "control" by authoritative decree. People pursue different approaches to the question and come up with varying answers - to some the master value is a tranquil and safe life, to others it is the fight for communism. On the other hand, not least because of this natural variety in people's ranking of values, there is a need to coordinate the differing rankings. And it might appear that to this purpose one needs to somehow persuade one another of a common morality.

There is no doubt that it is desirable to be intelligible, logically sound and persuasive in one's ethical reasoning with others. And ethical reasoning is something we all engage in some form or other, to a larger or lesser degree. Pondering the common good, for example, is among the staples of ethical reasoning.

But I would caution: we may overemphasise (a) the need for commonly reasoned moral beliefs, which concerns especially the tacit (b) assumption that such common presumptions need to form a consistent, logical whole. I suspect that ethics is apt to be tempted by a presumption in favour of (a) and (b).

I would conjecture that people are capable of coordinating morally without much express public reasoning, or even personal reasoning. The question is how they do it, and what transrational synapses are at work in linking people up in morally coordinated patterns of interaction. This seems to me a hugely important project for descriptive ethics.

Also, I suspect that a strictly hierarchical conception of moral attitudes is more a need derived from academic practices than one of human beings steeped in life outside the ivory tower. Both as relatively autonomous individuals and as socially interacting agents we probably fare better with flexible and permanently rearranged moral weightings, which may be effective because they are often fuzzy, compromise-based, contradictory and dynamically inconsistent (inconsistent over time and in different situations). Bad ethics may actually be a sign of moral fitness. That is to say: adaptable moral comportment may look bad if logically reconstructed, but it may represent the very precondition for attaining stable morally desirable outcomes such as peace and trust.

Moral inconsistency is always a major defect in rationalist accounts of correct behaviour. Yet in practical life it is a tool and disposition that is indispensable in living an alert, judicious and personally satisfactory life.

Thus a man, Mr. A., may well believe in the fundamental equality of human beings, treat his contemporaries of race-and-nationality (ran) 1, and ran 2, and ran 3 in compliance with that rule, yet discriminate against ran 4 in contravention of that principle. The difference being that intermediary conditions that do not apply to ran 1, ran 2, and ran 3, do intervene in the case of ran 4. Unlike those belonging to the other groups, members of ran 4 may happen to exhibit features unpleasant and threatening to Mr. A.

Adherence to a consistent moral philosophy may be injudicious and ultimately even self-defeating (producing morally defective results), owing to at least two reasons. (1) Such adherence may rely on reasoning too abstract to capture the conditions of real life - as in the case above. (2) There may be a trade-off between formal consistency and adaptability, the latter being a highly effective feature of moral behaviour, especially, but not only, in situations where convergence by deliberation no longer progresses and the rationalised moralities of the contending parties arrive at an insoluble impasse.

An ample record of give-and-take (adaptable morality) may be required to build the level of transrational trust that encourages to overcome impasses created by incommensurable rational moral conclusions.

To be continued in What Is Ethics ? (3).

What Is Ethics? (1) - The Science of What We May or May Not Do To One Another

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Ethics - A Social Science - The Science of What We May and May Not Do To Each Other

It appears to me that ethics is a perspective on things that presupposes community and social interaction.

Ethics concerns itself with the evaluation of the consequences of human deeds that affect other human beings; its fundamental mission is to establish how far and with what degree of admissibility an action by a person furthers or damages or leaves unperturbed the interests of other persons.

Ethical questions may be discerned from questions of factual correctness ("is it factually correct that b if a?"), in so far as they address the issue of moral correctness, i.e. the relationship of an action to the demands or requirements of a community or a member or members of the community.

Factual correctness is established if an action comports with the intention it is supposed to be serving. Can I drive a nail with my thumb into the wall? Moral correctness is established if an action comports with standards that reveal whether a person's actions entail permissible consequences for other persons. 

Can I fart in the presence of my host? Well, we would rather use the phrase "ought I," rather than "can I," to mark the difference between the factual and the moral dimension. Of course, I can fart in the presence of my host. That is technically feasible under most circumstances. But ought I to fart in the presence of my host? This addresses the question of whether the interests of another person are affected? Will my host feel annoyed by my action, and are his interests enforceable in terms of a code of conduct.

I suspect, ethical issues will combine both interest (establishing relevance to the parties) and enforceability under a moral code (establishing real impact).

People will tend toward (1) a common moral idiom (code), and they will adhere to it only when it is (2) enforceable. 

The individual is restrained by (1) and (2), which force him to respect the interests of other persons.

The restraints of morality are categorical in the sense that a member of the moral community to which they apply cannot ad libitum take action contravening the common moral code.

A Diversion on Moral Lenience

Incidentally, it occurs to me that the reason why small, "primitive" communities tend to have rigid and categorical moral rules is that they are less powerful enforcers than the modern state, which may leave tremendous latitude to personally autonomous action, because the state is still stronger than its citizens, however powerful their free arrangements may have made them. A small community cannot tolerate disrespectfulness vis-à-vis the network of moral demands binding to its members, because the tightness and connectedness of these commands represent the true power of enforcement. The system is protected by severe punishment for the slightest disobedience. It is the ability to deter contravention that infuses the system as a whole with venerability and power. 

If you have means of control, punishment, and coercion as powerful as those of the modern state at your disposal, you are in a position to let people go their own ways to a far larger extent. Let them laugh at the powers-that-be and build their profitable factories; the state will be able to enforce obedience when it matters to it - on tax day, or when the payer of the tribute tries to cheat etc.

Absolute, Relative or Deliberative

Morality is absolute - in many communities. Whether absolute or categorical, the many different moralities that we encounter in different places and at different times suggest that morality is relative (to the circumstances it addresses or finds itself tied into). Some conclude that therefore we live in a world of moral relativism - that every morality is as good as any other.

Morality versus Ethics

Ethics is deliberative. It is an effort to support moral claims with reasons and persuasive arguments. Ethics is an exercise that can work as an antidote to moral relativism, because it tries to show that some arguments have more merit than others.

Gray's Liberalism (2) - A Review - The Unity of the Liberal Tradition

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Continued from Gray's Liberalism (1)

Ancient Freedom 

Gray sees Greece and Rome as part of the pre-history of liberalism. Personally I feel, research into the nature and extent of freedom in ancient times may prove to be rather a yielding exertion, especially research into the Republican, pre-Imperial Rome, where modern notions of liberty may be found; also I consider Hellenistic Stoicism a significant influence on later forms of pluralistic freedom; but I have no time for a deeper query. See also A Modern Story - Politics and the State in Ancient Greece, The Invention of the Modern Public, Freedom and Ancient Greece, and Demos and Freedom - Robust and Non-Robust Conditions of Freedom.

Modern Freedom

As a political current and an intellectual tradition, an identifiable strand in thought and practice, liberalism is no older than the seventeenth century. (p.xi) 

Like Gray, I tend to think that liberalism is a specifically European product, whose identity is closely tied to the unique circumstances surrounding the rise of the West - from the demise of the feudal order to the American Revolution. 

It is an interesting question to what extent non-European modern societies (such as Japan, Singapore or Hong Kong) have been able to take a short-cut to liberalism, by importing and imitating the specifically liberal advancement that had taken centuries to grow in Europe; but I cannot deal with this topic presently.

Freedom's Resilience

I would challenge Gray on his conjecture of

the near-eclipse of liberal society by totalitarian governments in our own time. (p. xii)

I do not think that fascism, national socialism or Russo-Sino socialism ever stood a chance to eclipse liberal society. And that is a phenomenal conclusion of the most momentous import for our species' fate. See The Corridor of Success. 

But I may be simply misreading Gray; perhaps, what he is saying is that during the rule of these totalitarian societies liberal society was nearly eclipsed. If so, it is still an intriguing question to what extent even modern totalitarian societies depend on liberal features in human interaction.

Gray's Timeless Core of Liberalism

Gray claims:

For all its variability, liberalism remains an integral outlook, whose principal components are not hard to specify, rather than a loose association of movements and outlooks among which family resemblances  may be described. (p.xiii)

This is a challenging proposition, and I wonder if I shall find evidence rather to refute Gray's conjecture than to corroborate it. 

Continuing from the above quote, Gray explains:

It is only thus that we can identify John Locke and Immanuel Kant, John Stuart Mill and Herbert Spencer, J. M. Keynes and F.A. Hayek, John Rawls and Robert Nozick as embodying separate branches of a common lineage. (ibid.)

Gray sees the Scottish Enlightenment as an era that would prove to be particularly effective in consolidating and promoting

the system of thought of classical liberalism ... when Adam Smith referred to 'the liberal plan of equality, liberty and justice', but the term 'liberal' still functioned chiefly as a derivative of liberality, the classical virtue of humanity, generosity and the open mind.  (p. xi)

The two friends, David Hume and Adam Smith should be especially interesting candidates for some profiling under the presumption of  detecting two proto-social democrats. Are their pronouncement systematically incompatible with what Gray calls "modern or revisionist liberalism"? Is there a strand of classical liberalism that is already open to revisionism? An intriguing hypothesis.

At any rate, which are "the principal components [of liberalism] that [harness the above diverse philosophers into a team, and] are not hard to specify"?

Or as Gray puts it:

Common to all variants of the liberal tradition is a definite conception, distinctly modern in character, of man and society. What are the several elements of this conception?

It is individualist, in that it asserts the moral primacy of the person against the claims of any social collectivity:

egalitarian, inasmuch as it confers on all men the same moral status and denies the relevance to legal or political order of differences in moral worth among human beings;

universalist, affirming the moral unity of the human species and according a secondary importance to specific historic associations and cultural forms;

and meliorist in its affirmation of the corrigibility and improvability of all social institutions and political arrangements.

It is this conception of man and society which gives liberalism a definite identity which transcends its vast internal variety and complexity.

(p. xii)

At the end of the chapter on The Unity of the Liberal Tradition, Gray commits himself to this contention: 

The character of liberalism as a single tradition, its identity as a persistent though variable conception of man and society, holds true even if [...] is has been subjected to a major rupture, when in the writings of John Stuart Mill classical liberalism gave way to the modern or revisionist liberalism of our own times. (p. xiii)

I am sceptical as to such a daring contention of cohesion. Even intellectual attempts at liberty may be spontaneous events rather like popcorn popping in a pan than a railway construction whose extension and shape are made up of the same set of building blocks and part of a uniform plan.

Continued at Gray's Liberalism (3).

Gray's Liberalism (1) - A Review - Preface

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I. Over-rationalising Freedom

In his preface to the second edition of "Liberalism," John Gray sketches some of the striking revisionary claims that he has come to believe in since the first edition was published.

I contend that Gray is overstating his case, much of which, nota bene, I am sympathetic to -- namely that liberalism as an ideology is a failure. 

The closer rationalisations of the conditions and purposes of freedom come to exhibiting the hallmarks of an ideology, the more they get into conflict with evolved freedom, and, indeed, vital postulations and/or implications of the conceptions of freedom inherent in them. 

The boundaries of freedom are elastic and provide wide leeway for considerably divergent accounts of the good society. Denial of freedom's elasticity is a sure sign of an ideological bend in a liberal doctrine.

However, only in theory does liberalism manage to become paternalistic, telling people what conclusions they need to draw from the idea, (the intimations and the latitude) of freedom. In reality, outside the realm of chatter, freedom refutes paternalistic liberalism. By acting in considerable freedom people inevitably depart from wonkish ideas where they should be going.

This, however, is a far from trivial state of affairs. Freedom is highly relevant, her absence a catastrophe, a disfigurement of the world we wish to live in that shocks us all.

II. Over-Relativising Freedom

It appears to me that John Gray is going wrong in that he fails to distinguish between the feasibility of a unified theory of freedom, which indeed is doubtful, and the feasibility of freedom as an empirical reality, which is undeniable given the nature of some of contemporary societies. Also what I am missing in Gray`s below pronouncement, are examples and evidence of "postmodern" oder "postliberal alternatives." Where are they to be found, what are they like, which of their features make them "better" or "as good as," or "as admissible as" liberal societies?

I doubt, subsequent chapters will provide the answers I am demanding.

Writes John Gray,

I think now that the search for foundations for liberal practice is both futile and unnecessary, in that liberal regimes are far from universally mandatory or desirable, and are merely one segment of a range of institutions that may be legitimate in the late modern, or early post-modern world.

Gray, J. (1995), Liberalism. Second Edition, University of Minesota Press, MN, Mineapolis, p. ix

In the subsequent sentence below, Gray`s position meanders closer to mine:

Like other variations on the Enlightenment project, liberal theory runs aground on the impossibility of formulating a rational morality.

Ibid.

I agree wholeheartedly, if by "rational morality" he means a game (of correct behaviour and institutional logic, i.e. rules and other constraints on human interaction) that can be completely described without yielding contradictions and indeterminacies that make it impossible to play the game. 

Freedom is no such game. 

Attempts at a unified theory of liberalism are at best descriptions of games that do not correspond with real freedom. In fact, their subject are games that cannot be played, or they games that some people think can be played, but are not being played because a greater number of people then them think they cannot be played.  

Ideological accounts of freedom are descriptions of games that are unplayable, they are about games that are not elected for play because in the real world of feasible freedom people are seriously dedicated to playing playable plays.

However, the following statement is a non sequitur. From the fact that we cannot have a consistent general theory of freedom, it does not follow at all that there cannot be freedom, nor that the freedom that we are able to accomplish is for that reason less attractive than alternatives.

If the foundational pretensions of liberalism are hollow, so too is the claim that in our historical context there are no viable alternatives to liberal institutions.

Ibid.

In the postliberal and pluralist view I now hold, liberal regimes are only one type of legitimate polity, and liberal practice has no special or universal authority.

Whether a regime is legitimate depends on its relations with the cultural traditions of its subjects and its contribution to the satisfaction of their needs. It is far from being the case thaT liberal regimes always come out top when judged by these measures.

p. x

I believe there are grounds to make a normative case for liberal society, and they can be relied on to establish inter-systemic superiority.

To be continued in John Gray's Liberalism (2).

Research into Liberty (4) - A Note on Rousseau and Transrationality

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I am interested in Rousseau’s fundamental question: how is it possible to be free and yet obedient to social constraints (principles, rules)? How do democratic regimes actually work in free societies?

My research into theories of freedom has made me aware that a free society cannot be fully accounted for by reference to rational insight into the workings and justification of the overall order. There are lacunae in public reasoning that are bridged by forms of interaction whose effects in terms of fostering workable social cohesion and peaceable coexistence are not consciously sought for. Thus democracies cannot be sufficiently explained in terms of commonly held or complex philosophical justifications; fragmentary justifications plays a role, but their coherence also depends on transrational structures, as I surmise in my paper X.

How and why do democracies function, work satisfactorily? And how does the inter-meshing of conscious strategies and transrational outcomes contribute to viable democratic practices? Such questions may yield significant implications for the ethical evaluation of types of social order based on political freedom. 

Widespread commitment to a political order, whether expressed by articulated reasoning or by revealed preference, may be important to that order, while not meriting the status of cause, being instead the reflection of numerous factors such as habits, traditions, inertia, opportunism, self-interest, etc. Is it possible to explain the functioning of a reasonably successful constitutional democracy in terms of a contiguous network of mutually compatible justificatory arguments? Why and how do we coordinate and collaborate in the absence of an ultimately consensual political morality?

Are the emergence, the presence and depth structure of a society’s common moral and political values adequately captured by the analogy of a deliberated consent? Is ignorance, rational and substantive, underestimated? And what forces are at play to keep the negative consequences of ignorance at bay?

Cohesion may be in large part due to emergent properties of dynamic disequilibrium interactions. Contributors to cohesion will not necessarily be predictable from the behaviour of individual persons /arguments.

There may actually be a tacit parallel between rationalistic justificatory accounts of democracy and neoclassical economics on one hand, and the intuitions of transrationality and heterodox economics, on the other.

Research into Liberty (3) - Applied Interests

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In a manuscript entitled "Freiheit verstehen" ("Understanding Liberty"), I had endeavoured to give an account of "Freiheit als Merkmal unserer Zivilisation" ("Freedom as a hallmark of our civilisation"). In my account of liberty, I intended to present a complete and consistent argument in her favour, adding up to a rounded synopsis of mutually supporting affirmative perceptions of liberty as represented in historiography, philosophy (with a special emphasis on epistemology), economics, politics and law. 

The more or less tacit expectation was that I would be able to arrive at a complete theory of liberty, based on the idea that liberty would naturally unfold, if the spontaneous interaction of free individuals was protected by certain rules and institutions from damaging influences on an optimal evolutionary order.

Thus, implicit in my conception of coherent freedom was the assumption that a certain set of rules and institutions would combine with the propensities of human nature to bring about an automatic evolvement toward freedom, i.e. a state of human development in which unprecedented levels of personal autonomy, productivity and wealth are attained under peaceable conditions.

However, as I was to discover two and a half years into the project, I was on the wrong track. It turned out that the faultiness of this approach was due to methodological misdirection. In principle, on a purely formal level, a complete and consistent argument in favour of freedom is feasible. Yet, its sustainability is to be ascertained only if lower levels of abstraction are admitted, where empirically saturated conditions become visible that confront any assessment of the reality or practical feasibility of a certain vision of freedom with significant new information forcing qualification and revision.

Holistic defenders of liberty either (a) ignore these "intermediary conditions" (conditions intermediary / situated between premises and expected outcomes, determining the feasibility of the latter) or they (b) tend toward selective evidence, purporting to corroborate the predictions produced by their highly abstract causal / justificatory set of basic arguments. 

The one insight most corrosive to grand unified accounts of freedom pertains to the inescapably political nature of human interaction. Human interests are of such enormous and natural diversity, comprising highly rivalrous and incommensurable stances and ambitions, that uniformity can be achieved neither in terms of perception or interestedness, nor in terms of justificatory evaluation. 

While my attempt at a general theory of freedom was intended to outline a social order representing an alternative to a highly politicised society, my findings eventually convinced me that the freer a society is the more politicised it will, of necessity, be.

This kindled in me a strong interest in political philosophy. Or rather, politics. A semantic correction that seems to me in order, in so far as some political philosophy does not appear to be primarily interested in politics, but in artefacts of specialised reasoning, loosely related to political reality.

So, ultimately, conditions that may be described as feasible freedom (as opposed to infeasible ideological utopias of freedom) are characterised by very high levels of political activity which expresses, generates and conciliates intense political dissension and competition.

Long before freedom begins to approach the purity zone demanded for her in various ideological visions, in reality, she diffuses into a heterogeneous farrago of opinions and interests. She is far more modus vivendi than being all of a piece. 

At the end of the day, my interest in freedom has spawned an strong interest in the political processes that achieve feasible freedom - dynamic equilibrium of unprecedented mass dissension in the face of societal peaceableness.

Therefore, encouraged by my findings described above, it appears that the prior operational issues to be looked into to better understand freedom as a hallmark of our modern civilisation relate to the factors that support the balance between dissension and peace that is feasible freedom. 

Having realised that complete and coherent justificatory systems of argument are incapable of capturing the phenomenon of freedom, I have become additionally interested in trans-rational mechanisms that ensure cohesion or other requirements of societal functionality, where these can not be attained by justificatory uniformity and consistency. I am also interested in the interplay and competition between rational and transrational tributaries to the dynamic equilibrium of feasible freedom.

As a further result of my findings, I recognise the need to address intermediary conditions, which is the same as calling for more attention to details and evidence of an empirical kind.

See Research into Liberty (2) - Intermediate Status and Forward Links - Ethics and Finance.