The Black Hole at the Center of Society: In Praise of Inefficient Markets

I've been finding it difficult to reconcile living in the modern economy with living a moral life.

Just by existing in society, I'm complicit in thousands of acts of waste, greed, and exorbitance.  I live in one of America's original sparse suburbias, with one of the longest commute times in the country.  I buy food from markets that trash hundreds of pounds of edible produce a week.  I work in a building that burns megawatt-hours a year on unused lights and computers.  And I teach my students that this is progress.  These are the things that lacerate my heart with a thousand cuts every day.

My theory about the sweeping popularity of the Occupy movement is that it gives voice to this very same tension in society at large.  It's an opening skirmish between the two fundamentally incompatible moral frameworks that are violently colliding.

The market economy, especially financial markets, are premised on arms-length transactions based purely on the profit motive.  There are minor caveats to this, for example socially responsible investing and conscious consumerism.  But in terms of the financial markets that really drive the economy (currency markets, OTC derivatives, interbank lending), there's simply no room for doing good.  Every financial scholar I've read (see Chapter 6 of Rajan's Fault Lines) and every financial reform that's ever been proposed, has taken as a given that the unmitigated greed of the financial sector cannot be changed.


Wall Street argues that greed is necessary for life as we know it - necessary for economic growth, for global trade, for the jobs and products we all depend on.  The protesters attack Wall Street for violating the moral norms most of us still believe in - honesty, fairness, and respect, to name a few.

The challenge is that both Wall Street and Occupy Wall Street are correct.  Greed is a fundamental part of society as we know it.  Anyone who has ever bought things from a store or worked for a business is a part of the system.  But greed also undermines the very society it enables.

The problem with finance runs much deeper than the crisis, and deeper than any legislation can address.  The problem is that finance is a gaping black hole in society where the normal rules of morality don't apply.

The horizon of unfettered self-interest has lately breached the borders of our personal lives, waging war with our better natures.  All of us now act like bankers when making financial decisions.  Which waffle iron to buy?  The one that's on sale!  How to invest for retirement?  To maximize return!  What is Groupon but a way to turn us all into rapacious arbitrageurs of the cupcake market?

We are Wall Street, and we've started believing not just in self-interest, but self-interest for any reason, at any cost.  The force of absolute self-interest will disfigure any law, institution, or incentive system that seeks to contain it, making me pessimistic that any reform can succeed without individual and fundamental reckoning.

To recover the gravitational balance, the logic of finance must loosen, our devotion to self-interest made less complete.  Not every arbitrage opportunity needs to be taken.  Some dollar bills, muddied and hidden down dark alleys, should be left on the ground.  Let us forgo Groupons and frequent flyer miles, when they cheapen our conscience.  Let our investments earn suboptimal returns, when placed in honest hands.

We'll pay a price for this - it may be the end of the world as we know it - but it will ease the dissonance in our hearts.

Long live inefficient markets.