Keynesian Economic Balance and Justice

Jeffery Sachs of the Huffington Post had this insight recently under the title

Capitalism and Moral Sentiments:

. . .The fascinating thing about this greed is that it is so deeply ingrained that neither the bankers themselves nor our economic leadership understands just how disgusting and dangerous it is. Even after the music stopped, to use Chuck Prince's now famous simile, the bankers keep dancing - with our money. They continue to grab billions of taxpayer dollars (in Merrill's case) or at least hundreds of millions of dollars (in AIG's case) with giddy abandon, in full view and with a straight face. And our economics officials declare that this is unavoidable or too dangerous to curb. Contracts are sacred, unless of course it is union contracts, in which case we should demand that wages and benefits be cut as conditions for government help.

The great scholars of capitalism, from Adam Smith to John Maynard Keynes, understood full well that a functioning economic system depends not on greed, but on moral sentiments and an acceptable social contract between the rich and the rest of society. The rich can make money, of course, but they must not flaunt it or consume it frivolously. Instead, they must invest their wealth for social benefit, whether in business or in philanthropy, or in both as in the case of history's most celebrated capitalist-philanthropists, from Andrew Carnegie and John D. Rockefeller to Bill Gates and Warren Buffett. It is only the dangerously arrogant rich or the servants of the rich who believe that morals don't matter in the great matters of finance.

Here is how Keynes famously described the "psychology" that propelled the first successful era of global capitalism in the late 19th century and early 20th century.

Herein lay, in fact, the main justification of the capitalist system. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a régime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect . . . The capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of 'saving' became nine-tenths of virtue and the growth of the cake the object of true religion.

Understanding the need for a moral code in the economy will enormously help the economics leadership not only to weather the storm of outrage that has rightly hit Washington and Wall Street over Wall Street's rampant and continuing abuses, but also to fashion -- finally -- a successful solution to the tottering banking system. The stalemate over banking has arisen because the economics team has been unwilling to take on the bank shareholders and management. It now reportedly plans to clean up the banks' assets through a new alliance of hedge funds and taxpayer dollars. That simply won't happen. The public won't tolerate such games for another round. The public won't accept more money going into financial bailouts until the banks are clearly being run for public benefit, not for the private gain of undeserving shareholders, management, and traders. America will not right itself until it regains a moral compass in economic affairs. That will require a new generation of financial leaders who will forswear the abuses of the past generation of Wall Street leaders. The faster that the economics team and Congress heed the public call for simple justice and decency in financial matters, and the more rapidly that translates into a true Wall Street clean up, the faster will come the economic recovery.