Summary: The financial sector has doubled in size as a %GDP since 1970, far exceeding its previous peak in 1929. The effects have been predictably broad and bad. One late stage symptom is the increased frequency of bubbles, perhaps even becoming our only driver of growth. To understand how this happens we should consult sociologists, such as one of the greatest of the post-WWII era: Daniel Moynihan. He describes how we’ve become psychologically adjusted to bubbles, rather than taking the political action to prevent them.
This is the follow-up to this morning’s Let’s ignore another warning from the BIS. Do we enjoy paying for burst bubbles? For the 3,000 and 3,001 posts I’ve posted some unusually good material, timely and relevant to us all.
Daniel Patrick Moynihan (1927 – 2003) was one of the greatest sociologists of his day. His prescient observations (often too radical for his time, such as seeing the effects of single-parent families) put him in the top rank of sociologists, as did his applying these skills to become an ambassador and 4-term US senator.
Today we look at one of his major papers: “Defining Deviancy Down“, American Scholar, Winter 1993. I strongly recommend reading it, being rich with insights about America. It gives a sociological analysis describing how we (society) adjust to changing levels of deviancy. Moynihan discusses crime and out-of-wedlock childbirth as forms of deviancy.
We can apply his insights to finance — specifically, the development of asset price bubbles.
About financial bubbles
First, some context. Financial bubbles — unsustainable rises in investments and asset prices — naturally occur in free-market systems. Classroom simulations show how easily they happen. Right-wing bugaboos to the contrary, bubble occur without fractional reserve banking, and happen under the gold standard — as seen in 19th C Britain and America. While painful, they might even have beneficial long-term effects, as did the great 1840s UK railroad mania. But Larry Summers and others fear we’ve entered a new era of secular stagnation, with an illusion of growth from bubbles — shattered when they burst.
This post rephrases Moynihan’s text, changing the subject from social deviancy to financial deviancy. I skip over the theory he gives in the first half. Alterations to the text appear in red; additions in brackets.
In one of the founding texts of sociology, The Rules of Sociological Method (1895), Emile Durkheim set it down that “crime is normal.” “It is,” he wrote, “completely impossible for any society entirely free of it to exist.” By defining what is deviant, we are enabled to know what is not, and hence to live by shared standards.