The Selfish Market

The Selfish Market

-        economy as organism    -

 

            In his seminal work Leviathan, Thomas Hobbes describes how human beings, desperate in the violent state of nature, agree with one another to give up their autonomy and place it on on person or people: “I authorize and give up my Right of Governing myself, to this Man, or to this Assembly of men,...This is the Generation of that great Leviathan…” (Hobbes, 2013, ch. 18). However, in the 21st century, the political Leviathan Hobbes imagined is no longer as apparent. Our liberal, democratic leaders are actually in positions that have been intentionally weakened in order to prevent the autocracy seen in our past. Instead of disappearing, this Leviathan has evolved into the free market economy that we base our lives around. Just like Hobbes’ Leviathan, our economic system is very much alive. This essay will argue for a comparison of the market as a biological organism, as well as explain the 2008 economic crisis and argue that the crisis was a manifestation of the vitality of the market.

            It is obvious to everyone that the economy is reactive. An exchange in Taiwan can create effects that are felt in Argentina--the complete opposite side of the system. This reactivity can primarily be seen in the changes in price, specifically those of the stock market. The numbers tick up and down, no matter how supposedly stable a certain firm or business or currency is. If, for Hobbes, money is the blood of the Leviathan, the price of stock is the markets blood, it’s movement is its heartbeat, and the companies are its capillaries (Hobbes, 2013, ch. 24).

            The vitality of the economy is not as unimaginable as it seems. In his article “The Science is Clear. The Economy Is an Organism”, David Sloan Wilson points out: “Key concepts such as ‘regulation’, ‘self-organization’, ‘adaptation’, and ‘selection’” clearly reference biological phenomena, not economic ones. Later in the article, Wilson reveals: “The word corporation is derived from the Latin word for body (corpus).” (Wilson, 2015) A more direct connection to biology cannot be imagined.

The Selfish Market

In The Selfish Gene, Richard Dawkins explained that reproduction is not centered around the body of the organism, but rather its genes. That is to say, genes do not “care” about the organism’s body, the body is merely a “survival machine” built as a sleeve to continue the coded information of a gene on to the next generation. (Dawkins, 2016, p. 19). The human body just happens to be a very useful, efficient machine that propagates genes that have existed for tens of thousands of years which is why he considers genes to have “...a predominant quality to be expected in a successful gene is ruthless selfishness” (Dawkins, 2016, p. 2) Under this understanding of genes, comparison to the market economy can be easily made. Ours is a “selfish market”, one that will follow its own ends using human beings (and everything else) as a mere means to those ends.

What are the ends of a market? Like any organism, the market wants to survive and the market organism will do anything to continue living. The other end is that of growth. While biological organisms want to propagate their species through reproduction, the market organism wants to ever “increase in the production of goods and services...” (Chappelow, 2019). With this increase in production also comes with profit maximization (and cost minimization) by any means possible. If the market would ever have to choose between human beings and growth, it would always choose growth. It is taken for granted that the market is “for” us--that it is the dog on the leash and we are the dog owner. In fact, the reverse is true, we are the dog being led, and sometimes we are led to disaster.

2008 Financial Crisis

The 2008 recession began with investment banks buying huge amounts of homes. Houses were great investments because they brought in monthly payments but they were also very low risk as the potential homeowners were screened. The banks profited immensely from mortgages and investors wanted to be a part of it so the banks sold these mortgages in giant collections called Collateralized Debt Obligations (CDOs) (Chen, 2019). CDOs brought huge gains to the bankers who sold and the investors who then profited from the monthly mortgage payments. Not every mortgage was safe however, but on the off chance that a homeowner defaulted, Credit Default Swaps were  used which essentially acted as insurance on behalf of the lender. Hundreds of billions of dollars of CDOs were issued in 2006 and 2007 (Barnett-Hart, 2009).

Eventually, the CDO river ran dry. There weren’t anymore potential buyers for homes that were also low risk because everyone that had a home already owned one. Regardless, investors still had a great demand for more and more CDOs. It was here that the investment banks made the decision that truly set the 2008 recession in motion: the banks began to accept riskier and riskier buyers in order to meet the investors demands. Instead of the safe, AAA, prime mortgages, they now gave out riskier, subprime mortgages. They did this by being lenient on income and credit scores. At first, it was gradual, but soon, the banks started giving out riskier and riskier mortgage bonds. By the end, “ninja” loans were being offered which were given to those with no income, no job, and no assets (Zuckerman, 2010). What’s more is that the bankers lied and gave these subprime CDOs a AAA rating.

The “ninja” borrowers were given extremely lenient adjustable rate mortgages (ARMs), but eventually the ARMs increased in prices that were well beyond the means of the homeowners (Kagan, 2019). Since the CDOs were filled with subprime mortgages, the defaults occurred in rapid succession. The CDOs to plummeted in price which meant that no one could sell the CDOs which meant that the banks and investors couldn’t pay their debts. What resulted was bankruptcies for businesses and institutions that ran the American economy (Altman, 2009).

The banks on Wall Street did not die, however. As they were having their last gasps, the “toxic assets” of Goldman Sachs, J.P. Morgan, Bank of America and others were bought by the US Government for around 700 billion dollars, most of it being part of the Troubled Asset Relief Program (TARP) (Amadeo, 2019). The US Government bailed the banks out because, they claimed the financial system would have collapsed completely.

The Nature of the Game

Many are eager to blame the individuals in charge of the banks for the recession. What caused the crash is deeper than just a few individual actors that acted immorally. What drove the irresponsible use of CDOs was the incentives that came from lying about how safe the mortgages were. Even if a brave individual would have spoken up and asked: “Wait! Let's stop and think about this,” they would have been fired and replaced the moment the words would have come out of their mouth, and then the process would continue. The market does not need a specific worker.  Insisting that the blame is on a few individuals prevents our realization that it is the market’s nature to create disasters like the 2008 financial crisis. After all, the bankers were following the only rule of the game: grow.

What is telling is that we could not allow for the market to die. Complete collapse would have been too horrific. Even after we see the destruction left in its wake, we still put it under life support as it was bleeding to death. It seems that, even at that point, we were unwilling to let go of the organisms goal for infinite growth. We were still hypnotized.

Evolution

            The market seems to have learned from it’s mistakes in the specific case of subprime mortgages. Delinquency rates of mortgages peaked at around 12% by the end of 2009 and beginning of 2010, and there does not seem to be a return to those dismal heights. The rate as of August 2019 is 2.59% (FRED).

            In other aspects, however, the prospects look grim. Global climate change, at its core, an issue created by the market. Fossil fuels have proved time and time again the cheapest and most efficient way to grow and expand. The fact that coal, one of the most polluting fossil fuels, is actually very cheap and efficient ensures that someone will always use coal if it is available (Sengupta, 2018). If someone objects and decides not to use fossil fuels in order to expand their business, they will quickly be dwarfed by a business that does. This is the type of natural selection that occurs in the body of the economy. The stagnating cells and bacteria will be purged, stronger and more powerful cells will be born.

            Perhaps the most forthcoming mutation from the market organism will be that of automation. Human labor has been a cost that the market has had to put up with since its inception, though soon it will not have to any longer. Predictions are varied, but it is projected that 47% of United States jobs will be subject to being automated (Osborne). What’s more is that the artificial intelligences are in communication with one another, solving problems and learning with one another. With these advancements in mind, it’s easy to imagine living in a world where man’s labor has been replaced almost completely, and this may happen sooner rather than later.

            The market, our own creation, will be able to go on without us and go on producing and consuming by itself. It will fly away, and we will be stuck down here, abandoned by our creation and master, in an Earth that it left desolate.

References

Altman, R. (2009). The Great Crash. Retrieved October 3, 2019, from Foreign Affairs website: https://web.archive.org/web/20090223132656/http://www.foreignaffairs.org/20090101faessay88101/roger-c-altman/the-great-crash-2008.html

Amadeo, K. (2019). TARP: Definition, Cost, Who It Helped. Retrieved October 1, 2019, from The Balance website: https://www.thebalance.com/tarp-bailout-program-3305895

Barnett-Hart, A. K. (2009). The Story of the CDO Market Meltdown: 116.

Bird, B. (2019). Subprime Mortgage Definition. Retrieved October 3, 2019, from Investopedia website: https://www.investopedia.com/terms/s/subprime_mortgage.asp

Chappelow, J. (2019). Economic Growth. Retrieved October 3, 2019, from Investopedia website: https://www.investopedia.com/terms/e/economicgrowth.asp

Chen, J. (2019). Collateralized Debt Obligation (CDO). Retrieved October 3, 2019, from Investopedia website: https://www.investopedia.com/terms/c/cdo.asp

Dawkins, C. R. (2016). The selfish gene. /z-wcorg/.

Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks (DRSFRMACBS). (2019). Retrieved October 3, 2019, from FRED website: https://fred.stlouisfed.org/series/DRSFRMACBS

Frey, C. B., & Osborne, M. A. (2017). The future of employment: How susceptible are jobs to computerisation? Technological Forecasting and Social Change, 114, 254–280. https://doi.org/10.1016/j.techfore.2016.08.019

Hobbes, T. (2013). Leviathan. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1878413

Kagan, J. (2019). Adjustable-Rate Mortgage (ARM). Retrieved October 3, 2019, from Investopedia website: https://www.investopedia.com/terms/a/arm.asp

Reporting on the State of the Climate in 2018. (2019). Retrieved October 3, 2019, from NOAA website: https://www.ncei.noaa.gov/news/reporting-state-climate-2018

Segal, T. (2019). Troubled Asset Relief Program (TARP). Retrieved October 1, 2019, from Investopedia website: https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp

Sengupta, S. (2018). The World Needs to Quit Coal. Why Is It So Hard? Retrieved October 3, 2019, from The New York Times website: https://www.nytimes.com/2018/11/24/climate/coal-global-warming.html

Sloan Wilson, D. (2015). The Science is Clear. The Economy Is an Organism—Evonomics. Retrieved October 2, 2019, from Evonomics website: https://evonomics.com/the-science-is-clear-economy-is-an-organism/

This 20-Second Video Summarizes 35 Years of the World’s Economy. (n.d.). Retrieved October 2, 2019, from https://howmuch.net/articles/world-economy-as-a-living-organism

Zuckerman, Gregory. (2010). The greatest trade ever: The behind-the scenes story of how John Paulson defied Wall Street and made financial history. New York, NY: Broadway Books. /z-wcorg/.