Jun 08 2009

American culture run amok

by at 2:30 pm under Uncategorized

Where Douglass North argues the centrality of institutions in checking behavior and reducing uncertainty, Avner Greif takes the argument into the cultural realm by laying out how those institutions are steeped in cultural values and beliefs. Culture too plays an undeniable role in the current U.S. (and global) financial mess.

Piggies pay the piper for overspending

It is not only freewheeling spending and credit addiction that caused the economic downturn, though both are at fault and arguably became part of the American economic culture. Also at fault is the approach to regulation, which helped lead to poor lending standards and overspending. Rather than cut the problem off at the pass as it became apparent a market break down was on the horizon, we reacted afterward, especially with talk of more regulation. Is this our culture at work? I think so.

Let’s use a Greifian approach to look at historical economic challenges in the U.S. An NPR story reminded me of American responses to financial troubles. The Great Depression gave rise to a slew of new regulations and regulatory bodies, such as the FDIC. Trouble in the early 1900s led to the Federal Reserve. One legacy of the savings and loan crisis is the Office of Thrift Supervision. Now talking heads and politicians are bleating about more regulation. What about smarter regulation?

Compared to Maghribi traders, the U.S. looks ineffective. The traders also used institutions as a check to human behavior and uncertainty and Greif outlines extensively why this worked. But our institutions are failing to do the same. Part of the reason is a network relies on trust and too many people simply do not trust financial institutions, and no regulatory body can change that overnight.

Another reason is an out-of-control network that is ineffective and inefficient. If your network is too large, the right hand won’t know what the left is doing. American financial regulation is so complicated and multilayered that you’d think the network would catch on when things start to go wrong. Instead, it is all too easy for agencies to pass the buck; instead of acting as a check, they are turning a blind eye and neglecting to be accountable.

Too dense a network can lead to trouble

Too dense a network can lead to trouble

Culture values are at work as well. What bank, what mortgage company would reel in risky practices at the expense of losing money? Certainly signs were on the horizon of troubles ahead, but lax lending continued because it was a moneymaker. People get caught up in America’s “land of gold” past and do not question getting approved for a house three times out of their price range or ever-increasing credit limits. Americans believe they deserve things and both individuals and institutions (run by individuals, lest we forget) get caught up in that fantasy. But as Jane Jacobs reminds us, those who stop innovating and producing and rely on the hard work of past generations will soon stagnate.

I imagine that this recession is a playground for Greif. There is a lot of historical arcs that put us where we are today, the primary being that the U.S. seems to react to financial crises, not divert them with a smarter network of institutions. It’s easy for people today to look at the Maghribi traders and see a quaint culture – and believe such a system of checks could not work in today’s world. This is a mistake. America has let its culture run amok over institutions and as a result the trust is gone. But just because our networks are larger and we live in a different world than the traders is no reason not to look at their model for ideas on rebuilding America’s economy. It’s time to stop reacting to the past and to start learning from it.

Greif - one of the few who can make a buck from the recession

Greif - one of the few who can make a buck from the recession

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