Wednesday, March 7, 2012

Finance Logic Can Banish Corruption

The economic power that some in the financial community attain bothers many people deeply. It offends our ideal of a society that aspires to respect, appreciate and support everyone. The pursuit of power that often drives financial capitalism seems contrary to the concept that finance should be about the stewardship of society’s assets.

Yet successful societies develop elites partly because they need leaders with the power to get things done. We have to make it possible for a relatively small number of people to use their personal judgment to direct our major activities. A system of financial capitalism will eventually imbue those in possession of such faculties with wealth and power.

Still, there is a reason that the level of resentment of the wealthy and powerful is so high: A free capitalist system can support an equilibrium in which some kinds of social conspiracy pay off. George Akerlof, in his 1976 article, “The Economics of Caste and of the Rat Race and Other Woeful Tales,” explains the tendency of certain social groups to form a sort of business conspiracy against outsiders. He uses the caste system, most notorious in traditional India, to examine the phenomenon of power elites in business and finance.

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