Georg Simmel, Global Capitalism and Anarchy

     To gain insight into the systemic variables that produced the gravest economic collapse since the 1930's, start with the work of Georg Simmel.

      In 1900 Simmel published The Philosophy of Money. It is a devastating critique of Karl Marx, especially when it comes to the creation of economic value. Simmel argued that Marx missed a crucial point. Like the hidden cement that supports a pillar, below any economic base is a lively interaction of people adding and subtracting value through an animated process of exchange. This occurs in any society, at any time. Think, for example, of the many diving (for buried treasure) companies established in England in the late 1600's. Initially companies with no track record saw their stock value increase by as much as 500% because of the technology that would supposedly dredge up gold and other valuables. When the ships actually unearthed worthless guns and tackle, the stock's value dropped like a rock because of the lively interaction that revalued what was supposedly a sure thing.

    Simmel stressed that economic value is never inherent in the object itself (e.g., an antique chest or a security rooted in subprime mortgages). Value is created when men, women and children establish a personal and societal scale that extends from the highest values through indifference to negative values, e.g., the "toxic securities" on the balance sheets of so many of today's American, European and Asian banks.

    Simmel also argued that the object in demand (junk bonds in the late 1980's) becomes a value of practical importance to the economy only when the demand for it is compared with the demand for other things; only this comparison establishes a measure of demand. Thus, on the Antiques Road Show, a sixty year old toy has one value if its paint is tarnished; another if the paint is superb; and still a third value if the pristine toy is still in its original box. The comparison establishes the criterion that people use when, in the lively interaction of an auction, they outbid one another for what is supposedly a very valuable object.

   Our contemporary predicament is that the invariable and incessant process of comparison that creates economic value occurs in a global economy dominated by the capitalist economic system. As Robert Heilbroner put it in The Nature and Logic of Capitalism, the system is unique because it seeks wealth, not as an end in itself, but "as a means for gathering more wealth".  Capital "is therefore not a material thing but a process that uses material things as moments in its continuously dynamic existence." A superb capitalist is at least a bit irrational because he or she uses capital to create more wealth which, ideally,  is then endlessly used to create more wealth. Eventually the "best" capitalists vie for first place on Forbes list of the richest people on earth. The criterion is not how they made the money; but who has the most billions at a particular point in time.

   Now, take Simmel's insight about the creation of economic value and place it in a capitalist system.  By definition the need to endlessly increase wealth demands that capitalists ceaselessly create new and innovative commodities for their customers. For consumers it can be the prestige attached to the latest Rolex watch compared to the latest Patek Philippe. For investment bankers it is the need to constantly create points of comparison that offer more profit from one investment rather than another. Thus, Sidney Homer receives the accolade of "brilliant bond specialist" because he devised the idea "of separating bonds from their dividends and selling the two securities separately." Edward Chancellor writes that the "breakthrough" allowed banks to take an "illiquid" asset like a home mortgage and convert it, through securitization, into a tradable security. In the pursuit of profit more "innovations" followed when the securities were subdivided into categories ranging from low to high rates of interest based on the comparison between levels of risk.

    From the early eighties until today a plethora of new "financial products" followed one another in rapid succession. Currency rate swaps, interest rate swaps, collateralized debt obligations and CDO's squared! In a global economy dominated by capitalists the need to create these better opportunities is a systemic variable; it cannot and will not disappear because, in capitalism, the pursuit of profit demands that imaginative bankers continually create the new enticements that, in comparison to others, induce institutional and individual investors to square their wealth by buying and trading the latest way to supposedly make more money than ever.

  From the point of view of the larger society, the inventive investment bankers or hedge fund managers are amoral and anarchistic. Simmel used the word "heartless". Bankers and other investors diligently make money selling long or short and, when the always animated process of creating economic value produces a bubble as big as that in subprime mortgages, the predictable (by Simmel)  result is what William Cohan calls the "wretched excess" of leveraging a bank like Bear Stearns to the tune of 34 to 1. It's unregulated lunacy; meanwhile, when the "House of Cards" collapses  the short sellers have no need to worry about the global ripple effects of their investments. So what if a Bear collapse "forces all security firms to mark their own assets down in the financial equivalent of mutual assured destruction". Anarchy and "heartlessness" are built into this system and one of the most absurd debates of our time is whether government regulation is necessary.

     Serious regulation is not only necessary; it is absolutely essential because the systemic needs of global capitalism will always produce new financial products; and the animated comparisons that create economic value will always produce the bubbles that today threaten everyone on earth.

   In America we waste time worrying about creeping socialism when the government is, by definition, the only institution that offers a shield against the anarchy and amorality that is at the heart of  the capitalist system.

       To not recognize the need for serious enforcement of meaningful financial regulations is to lay out a red carpet for the lively interaction that will produce the next era of wretched excess - and the next lobbying effort by "financiers" arguing that government regulation inhibits the creation of  the wealth that flows from them to the rest of us.

   It's a crock; and the crock will break again unless we check the systemic variables that, by definition, produce amorality and anarchy.