ABCDEconomy “R” as in “Rules”

ABCDEconomy by Luigino Bruni

Rules: whoever makes them, we´re the “referees”

Published in the weekly Vita, March 20, 2009

A guide to rereading the key words of economic behavior, after breaking down the myths and bursting a few bubbles. Luigino Bruni´s "Dictionary" has arrived at it´s seventh entry. The topics already analyzed over the last weeks are: Happiness, Profit, Market, Bank, Investment and Responsibility. This week, "Rules".

No civil system could work without rules. The market is one moment in civil life and therefore, to work well, it requires rules. However, it has been at least two centuries since the debate began about who should write the rules and who should reinforce them. The popular idea about the rules/market relationship is more or less as follows: politics write the rules, judges reinforce them, and the market accepts them as good and moves within them, considering them as limits.

Often associated with this popular view, especially in the media, is a metaphor dealing with sporting alliances: the Italian Football Association or the Italian National Olympic Committee writes the rules, the referees and sporting judges reinforce them, and the players play within these given rules. If each does his part, the sport is a civil and good activity. From this perspective, politics isn’t one of the players on the field, and neither is the magistrate or the various organs and institutions who hold the responsibility of implementing the rules and making sure they are respected.

Being faced with the current crisis evokes this simple metaphor: the crisis exists because the rules aren’t written, or they are not written well, and the few good ones that do exist aren’t reinforced. Here is the simple recipe for getting out of the crisis: more political presence in finance and in economy, with new and efficient rules, more control and more attention on behalf of the referees and sporting judges.

In reality, as you may have already intuited, history is much more complex. Before anything, with so-called globalization, it´s no longer clear who is playing, who writes the rules and who is the referee. The large businesses, banks and finance are not only "players" within rules written by others (like politics). They themselves now set the norms: they call the free-kicks, the penalties, the off-sides and the handballs.

They also decide when substance-use is doping or not, and in some cases they affirm that doping is even positive and virtuous for the market (as in the case of the doubled executive salaries). On the other hand, politics no longer limits itself to making rules, but becomes a player as well. Today, we know that political subjects have private and economic objectives: they want to be re-elected; they have constraints of budget, consensus and public debt. Therefore, they often leave their post as producer of rules and walk onto the playing field to compete with the economic players.

Rules are never neutral, especially in markets, and by fact, every rule is advantageous to someone and penalizes another. The rules of Basle II, for example, made life very difficult for civil society’s subjects who went to banks to get credit. By applying the rules, many toxic titles were more secure than those of parishes or social cooperatives.

That is why there are always more people who sustain that the only good rules are those that arise from the "bottom", from self-regulation in the business world. This debate is particularly lively when talking about a business’s social responsibility. There are many who maintain that ethic rules should be freely adopted only by those who wish, and that the "old" market competition will "force" businesses to be responsible, otherwise clients will punish them.

How then are things going? In the first place, we certainly need to use a more sophisticated and complex metaphor while referring to the mechanisms of the economy and of global finance: it’s not sufficient to think of the market as a soccer tournament, or of politics as the only custodian of the rules and the common good. We need to acknowledge that today the rules are written by (or often not written by) various subjects and agencies, including the market and civil society. In a world that moves in real time, the timing of politics have become too slow for the economy, and the rules show up when the phenomenon to be regulated has already changed into another one. Besides, more and more, the rules need to be set with a global vision. In an economy and finance which has lost it’s local connection (to which traditional rules were linked, thinking of taxes), if a country severely regulates finance, businesses and banks  move their headquarters elsewhere. Until registered business headquarters exist (that will publish splendid public reports) in fiscal paradises (also European), it will only be naive to speak of new governance of economy and finance.

In the end, even in a pluralistic approach to regulation, we must recognize that spheres of civil life do exist - among which is finance - where information is asymmetric, and where there are incentives for who knows better how to take advantage of who knows less. In these sectors, more effective rules and better attention from the part of economic and civil institutions would be very opportune. What remains even truer today is that it is adult citizens who need to recover entire portions of freedom, democracy and civilization,  which they have too long delegated to politics and inspectors, thinking that they are inspired by the common good. Independently from who is a "producer" of rules (parliament, government, agency or self-regulation norm), as citizens we must "inhabit" the places of economy and finance, taking back our active citizenship. The first to have legitimate interest that the rules be applied, from wherever they originate, are citizens.

This crisis also tells us that we have been too long distracted, thinking that impartial referees are watching over our savings and gains. From the fear and uncertainty of these times, you don’t only come out with Leviathan or Hobbesian or more severe sanctions. On the contrary, these authoritarian threats end up increasing mutual distrust, and they put freedom and democracy in peril. The first rule of economy today is called participation.

Next week’s word is "Interest".

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