Opinion

Edward Hadas

In defence of financial coercion

Edward Hadas
Mar 26, 2014 15:45 UTC

Last week the British government gave a new freedom to its citizens, or at least to a relatively privileged group of them. No longer will pensioners with defined contribution retirement plans be forced to invest their accumulated funds in an annuity. The old requirement was a form of financial coercion: government rules which influence behaviour.

For the pensioners in question, the new arrangement may feel like liberation. They will no longer be enslaved to a product which offers meagre yields. For the rest of Britain, though, financial freedom has probably been reduced. All taxpayers will end up paying more for the medical bills of some pensioners, those who would have had an annuity income but who might now be forced to turn to the state if they run out of money when they need expensive care.

The elimination of one sort of coercion for some people brings a new coercion for others. The pattern is typical, and not merely in finance. Freedom is usually tied to constraint. If I am free to play loud music, my neighbour is forced to endure a racket. If I am free to charge as much as I want for a product that is in short supply, the rich are free to buy but poorer people are forced to do without.

In complicated modern economies, this financial coercion is inevitable. Banks and other institutions which collect and disperse money cannot operate well without trusting customers. These intermediaries are so big and distant that customers will not trust them without strong regulatory and legal protection. So the freedom of banks to decide about their capital structures and lending practices is justly restricted for the sake of protecting the value of the funds deposited in the banks. Indeed, more of that sort of financial coercion a few years ago would have saved the global economy a great deal of trouble.

The financial system will always be designed to promote some mix of social goods. In well-organised societies those goods start with prosperity and security. In more corrupt arrangements, the interests of particular groups – bankers, lenders or borrowers – are favoured. In all cases, some activities are well rewarded and others are discouraged or punished. Financial coercions can bring greater freedoms overall or can improve life in some other ways.

How can a plane vanish in a small world?

Edward Hadas
Mar 19, 2014 15:23 UTC

How can a plane vanish in a small world? The information vacuum around Malaysia Airlines flight MH370 is as unusual as it is disturbing. In the modern, globalised economy, things normally work well. When they don’t, the causes can usually be identified, and changes often follow to prevent recurrence. So far, MH370 is a distressing exception.

Until a few decades ago, a plane that disappeared from radar would simply be gone. Today, though, it is normally possible to unravel almost all such mysteries. There is much more knowledge than ignorance in technical matters. Aircraft have numerous onboard systems to ensure they are going where they should be and working as they should be. These interact with overlapping communications and tracking arrangements on land and in space. Indeed, so much information is generated in the normal course of flying that, without expert knowledge, the Boeing 777 aircraft could not have come so close to disappearing from electronic sight.

The cloud of information surrounding aircraft is particularly thick, perhaps because the idea of flying seems exceptionally unnatural to many people. However, most parts of the modern economy are remarkably well monitored and measured – and more so all the time. Tastes and practices can be traced with uncanny precision. Cameras track people’s movement, sensors watch machines and buildings, labels track when and where a product was made. When something goes wrong, the precise problem can almost always be identified.

Russia and the unreliable West

Edward Hadas
Mar 12, 2014 16:13 UTC

The revival of East-West tension over Ukraine looks thoroughly geopolitical. But the context is bad economics. In the last century, Russia was damaged by flawed ideologies which originated in the West. And today it is damaged by Western economic policy.

It is easy for Western Europeans and Americans to look down on the Russian economy. Since the breakup of the USSR, the nation’s real GDP per person has increased at a 3.9 percent annual rate. That is a modest accomplishment for a middle-income country with a great deal of resource income. While Ukraine’s 1.7 percent growth rate is even worse, Armenia, Poland and Romania have all grown faster than Russia.

Now look at it from the other side: what the West has given Russia. There are good things, from markets for energy exports to many types of sophisticated technology. However, these positives are dwarfed by two disastrous ideologies in the past and two selfish and hostile policies in the present.

The ongoing ethics struggle of banks

Edward Hadas
Mar 5, 2014 15:58 UTC

The Swiss Bank Employees Association has told an uncomfortable truth: it was “generally known” that for many years some of their employers profited from customers’ “tax evasion.” That is incontestable, as many of the banks’ managers concede. But the practice, supposedly now ended, raises an important question about ethics and business. Why were neither the managers of the Swiss banks nor their employees worried by this business model?

The hardly hidden truth was included in an Association press release which called on Brady Dougan, the chief executive of Credit Suisse, to apologize for insulting the Swiss bank’s employees.

Dougan, who was trying to explain to U.S. legislators how Credit Suisse had stopped helping Americans escape taxes, said that “some Swiss-based private bankers went to great lengths to disguise their bad conduct from Credit Suisse executive management.” The claim, said the employees’ group, slighted the professionalism of the workforce. Besides, it was “hardly credible.”

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