Over the last few decades, Wall Street took on all the trappings of a large technical/scientific enterprise. The market, we were told, had become all about serious and even-handed analysis. Investment firms hired newly minted PhDs in theoretical physics.Adam Frank promises to publish more on this topic, so check the NPR web site for new postings.
Their job was to look into the global market's complexity. Supercomputers, in silent platonic mediation, peered into hyperdimensional simulations of market futures. Universities opened up programs in "financial engineering" developing advanced computer codes and data mining techniques to fill the analysis demand. The best and the brightest headed to Wall Street just like they had once flocked to science, medicine and engineering. There was only one thing missing in all this — the community ethos of responsibility that science, medicine and engineering had developed for themselves.
Here is a question — science manages to be self-policing, why can't investment banks do the same?
By self-policing I mean science should, eventually, find its own errors, its own failures in judgment. It does this through its own cultural institutions and cultural norms — what one may call its ethos. In the Reagan era, Wall Street was given the chance to do the same as regulations were stripped away. You don't need me to tell you it was catastrophic failure.
Sometimes people say that science is amoral, that it does not have a set of values inherent in its practice. Nothing could be further from the truth. There is one great rule in science, which none dare break. The rule every graduate student gets with their mothers' milk.
Fraud occurs in science but it's surprisingly rare. Scientists are loath to falsify data for a variety of reasons. One reason is that sooner or later the world will speak for itself and the fraud will be exposed. Another is that a scientist's worth is only as good as their reputation. Even a whiff of sloppy practice can be enough to sink a career. The last reason is a sense of community. Your results will be passed on and used by others. Falsifying results means stinking up the watering hole for everyone else. These three imperatives form a skeleton of the cultural "boundary conditions," which comprise science's ethical norms.
They are boundaries that one can imagine might have worked in a rapidly "complexifying" world of global high finance. But the harrowing culture of greed emerging from the go-go 1980s made those boundaries far too easy to cross.
In the current debacle, people knew the fraud was out there and might get exposed but, it seems, they would most likely have moved on by then. The banks would be "too big to fail" anyway.
As for reputation — who cared? All that mattered was wealth, the more obscene the better. Community? Please, don't be a rube. This was the world of Gordon Gecko, hero to a thousand Masters of the Universes. Exalting the self was the only value.
In the end, it was not the complexity of Wall Street's deals that was its (and our) undoing. The crazy products like derivatives and collateralized debt obligations that seemed to demand advanced mathematics to understand them were just part of the problem. Other endeavors like science handle this kind of complexity just fine. The problem was human, all too human.
It is a culture that perverted its sense of reputation, responsibility and community that brought us so close to ruin.
Even in an era of light-speed trading guided by multi-dimensional modeling, it was the simple perversion of communally-held values that shook us to our foundations. It was not complexity alone but in the face of complexity we needed (and still need) integrity. And, finally, given the complexity of the issues we now face from the global economy to global warming, the kind of value vacuum Wall Street created is something we can no longer endure.
Here's what I distill Adam Frank's analysis down to:
- Money corrupts causing people to lose sight of values, reputation, and community.
- Traditional disciplines (he mentions science, medicine and engineering) have developed a code of ethics. The financial industry has not.
- The financial industry had a chance to develop "self-policing" when right wing ideologues starting with Reagan argued for and won "deregulation". No code of ethics, no self-policing, emerged. Instead you got greed and fraud.
- Arguing that Wall Street's failure was just an unfortunate side-effect of "complexity" or "bigness" fails to accept that other disciplines, like science, handle far more complex data and far larger data sets and don't have the fraud and corruption witnessed on Wall Street.