“I am inclined to believe that the biological and collective unconscious layers of conscience, as well as the fragmentation of the psyche, are nowhere more pronounced than in economic life… If a government were to attempt the elimination of all economic inequalities, it would have to interfere with the economy to such an extent as to render impossible the moral development of the individual… The influence of the individual — and thus of moral reflection and conscience — decreases as the power of collective interests increases, requiring a strengthening of central authority. Life becomes even more mechanical” - Eugen Böhler (1893 – 1977)
As economic inequality grows, measured for example by the Gini coefficient for countries like the UK, US and China, so does the attention to this problem. In academia, the Institute for New Economic Thinking (INET) together with Columbia University organised a conference on this topic earlier in the year, no doubt guided by the view of Joseph Stiglitz who is associated with both institutions and author of The Price of Inequality. In the media, The Economist recently highlighted research which revealed that in the US the top 1% enjoyed real income growth of 31% between 2009 and 2012, compared with growth of less than 1% for the bottom 99%. Historically the distribution of ‘returns on income’ shows a clear imbalance:
The Change in Real U.S. Income
Source: https://elsa.berkeley.edu/~saez/saez-UStopincomes-2012.pdf
Other reports show a similar picture which overall raises the question of fairness. In politics Senator Elizabeth Warren recently warned that the US “should not be run for the biggest corporations and largest financial institutions”. Inequality also raised concerns among investors such as Stanley Druckenmiller1 and Albert Edwards2, both of whom have been very outspoken on the causes and potential (dire) consequences.3
My contribution to this debate is informed by the archetypal theme of ‘history rhymes’. In politics, for example, Bill Clinton successfully ran on the ticket of income inequality in 1992, which could be repeated by another candidate in 2016. For our purposes, this theme often motivates us to find inspiration in the insights from the economists of old, like Keynes, Hayek or Friedman. Among my favorites of that era is Eugen Böhler who was the leading economics professor at the Swiss university ETH and a friend of psychologist Carl Jung. They shared extensive correspondence and many of the topics they discussed remain valid to this day. In particular, Böhler discussed the role of conscience in economics4, a topic closely related, for example, to the role of identity in economics as popularized by George Akerlof and Rachel Kranton.5 It is also a topic that I believe is missing from the debate on inequality.
The broader context for my contribution follows from one of my previous articles, Lehman’s Lesson, in which I explain why the current paradigm leads to category mistakes and fallacies in our debates. Among the key ones is the assumption that markets are somehow separate and different from us. More specifically regarding this topic, critics state that free markets are among the main causes of inequality. The mind-body perspective debunks this criticism simply by pointing to the stylized fact that we make up markets. We therefore need to look at ourselves to find the causes for any market failure, and I will point particularly (and ironically) to the markets’ lack of freedom. I will also argue how modern economics, with its emphasis on rationality, mechanics and quantification, leads to the repression of conscience with inequality as one of the unintended consequences.
What is conscience? Böhler defines conscience as “a sense of balance and wholeness… the sum of human moral experience… an authentic awareness of the self which makes decisions with regard to values. Good and evil are its chief concerns”. He contrasts it with “ego consciousness which makes decisions about usefulness of actions, i.e., about their cleverness or stupidity”.
Böhler’s comment on values is particularly important. Expressing an early intuition of evolutionary psychology, and emphasizing the dominance of economics in modern life, he argues that the “economic value of things, their market price is biologically conditioned” and that it “expresses their collective vital and existential value, which enters into the decision-making process in all other spheres as well”. Following Jung, he further distinguishes between the personal (subjective) and collective (objective) layers of the mind and how, consequently, “conscience is characterized by the same sort of contradiction as the psyche in general and that we can consider it as a unity only to a limited extent”.
Böhler’s “contradiction” captures one of the central tenets in complex psychology, namely the tension between (opposing) forces and the dynamics that spawns from it. On that note, readers of my earlier articles are familiar with my interpretation of ‘complex’ in terms of economics in general and markets in particular. In short, the human mind is a complex adaptive system (CAS) at the micro level, and interacting human minds give rise to the market mind as a CAS at the macro level, manifesting collective consciousness. Specifically, the individual investor’s mind reflexively projects its internal dynamics onto the external world (which includes other minds), leading to the composite market mind. Those dynamics consist of competition and cooperation between, using Böhler’s terms, “all our psychic resources” which drive a process of discovery. Never predetermined, always creative and often painful, e.g. in terms of fallibility, this discovery process leads to (physical) innovations and (mental) insights. As the mind’s breakthroughs they allow us to grow and prosper. As ‘internal surprises’ they are particularly important in order to adapt to ‘external surprises’, e.g. threats. Crucially, such self-organizing process by way of novelty is the sine qua non of any CAS in general. What makes the mind, in all its layers, special is the ultimate symbolic expression of this process via numbers, e.g. prices in markets, which bridges the material and the mental.6
Under normal circumstances, healthy minds reflect mean-reversion in the sense that excessive imbalances get corrected (or “compensated” as Jung likes to say, no pun intended). Sustained imbalances, on the other hand, are unhealthy and are primarily caused by some interference in the discovery process which limits exploring, e.g. ‘the digging for values’. In terms of the market for example, the mind is not allowed ‘to go there’, so it is prevented to fully explore (read: capital controls). A variation on this constraint is a mind being forced ‘to go there’, i.e. being ordered to explore (read: QE). Or the mind is protected ‘from evil’, so it is safeguarded from exploring (read: Bernanke put at 666). Or the mind is spoon-fed, so it does not have to make an effort to explore (read: subsidies and rent-seeking). Translated, price discovery is a delicate process in the market’s mind and price manipulation, in whatever form, has unintended and mostly negative consequences.
How does this apply to our topic? Modern economics, particularly policies of market interference, heavily overweighs “ego consciousness” with its pretense of knowledge and predetermined “clever actions” at the expense of awareness of “values”, to use Böhler’s terms. An inflated consciousness, Jung said,
…is always egocentric and conscious of nothing but its own existence. It is incapable of learning from the past, incapable of understanding contemporary events, and incapable of drawing right conclusions about the future. It is hypnotized by itself and therefore cannot be argued with. It inevitably dooms itself to calamities that must strike it dead.
This is what I meant earlier with repression and the inevitable compensation. Echoing at one point the dire warnings of Albert Edwards and David Stockman, Böhler clarifies this further:
…certain economic conditions, rational as they may seem, are incompatible with the basic instinctual structure of man. Such conditions will give rise to irrational counter-forces which endanger the entire economic and social system. The difficulties in which present-day financial policies find themselves may be traced to similar causes. It is here that “lack of conscience” has been most blatantly obvious.
In today’s world, Böhler’s “financial policies” include monetary ones, like QE, which primarily benefit holders of financial assets, i.e. the ‘1%’. But my concern that current practices are making matters worse has a broader remit, if only because they are built on longer-existing shaky foundations. First, as I argued in Lehman’s Lesson, modern finance cannot deal with the reality of Lehman’s collapse as an existential experience, i.e. we haven’t learned its lesson about the true nature of markets. Specifically, infused into the socio-economic fabric of market states are qualities we experience that complete our understanding of those states. These qualities appeal to Böhler’s non-analytical “psychological functions” which modern economics and the resulting mechanistic approaches, e.g. algorithmic trading, repress:
Among the psychological functions, emotional forces such as feeling, sensation, and intuition, which constitute the true cultural heritage of mankind… are considered to be inferior, and so they remain primitive. Human ability to evaluate, which is the basis for any economic conscience, remains underdeveloped.
The obvious point is that these functions also apply to issues closely related to inequality, such as bank bail-outs, bosses, and bonuses. We can also call them to evaluate QE3, i.e. does it intuitively make sense? It’s just that these functions themselves are not valued sufficiently. More generally, in our discipline messages from intuitions and sensations largely get dismissed. The EMH, for example, proclaims that they get snowed under anyway by the white noise of randomness, i.e. rationality swamps everything. Alternatively, they get crowded out by the ‘objective’ signals from our quant models to which we outsource decisions. We certainly do not get trained in using these functions in a disciplined way in order to complement our analyses.7
Moreover, bail-outs, guarantees and other fiscal support measures have resulted in a collectivisation of risk and responsibility, away from individual risks and responsibilities. Individual debts have been forgiven or morphed into a shared debt burden, mostly to be carried by future generations, emphasizing the ‘pass the buck’ mentality that has encroached upon our collective psyche. As a consequence the state-banks complex has emerged as a powerful force in determining government policies and enforcement (or not) of laws, again seemingly benefiting the ‘1%’. The dominance of large participants in markets, be it the too-big-to-fail-banks or central banks or the commodity giants, reflects a form of inflated consciousness, a symptom of the imbalance in markets. Combined with collectivization this dominance also leads to a growing number of individual investors who see a rigged market where it is no longer ‘valued’ to develop personal discipline nor to take personal responsibility. Again, this is just another symptom. History rhymes indeed when we can transpose Böhler’s words so easily onto our current situation more broadly, where the
controversy between the economic and social-welfare viewpoints or the conflict between military and national priorities… are carried on by means of abstract arguments which do not commit anybody personally… As the power of the establishment grows, invading the sphere of the individual more and more, and as people become more and more isolated, social cohesion and coexistence must be increasingly regulated by outer, “objective” standards. Impersonal order and regulations replace inner, personal discipline.
Viewed in combination with my previous points, we should be clear on what free markets are. They are certainly not those of the modern era, let alone those of today. Consequently, we cannot accuse free markets of somehow failing, when those markets never have been free, something I call the myth of “The failure of free markets”. The risk in our debate is thus that we seek to limit the freedom of markets even further whereas, instead, we should unleash it and its innovations for ‘the good of society’, as argued for example by Robert Shiller8. Such democratization, for the lack of a better word, involves among others access to and transparency in products and prices, e.g. away from OTC trading and shadowy deals. With such freedom also comes individual responsibility rather than entitlement.
Not that establishing free markets is ever likely to happen, of course. History teaches us that the political elites in particular never see themselves as part of the problem, e.g. ‘Our democracy is working just fine… (image: accepting a donation for the re-election campaign)… thank you very much’. Nevertheless, we should try to make improvements to the current status. It means, as Stiglitz argues, a reform of the economic and political systems. It’s just that I disagree on the type of reform. For what it’s worth and in summary, my suggestion for reform is based on the following arguments:
- In principle, free markets benefit society and deepen democracy;
- In principle, true price discovery underlies free markets;
- We should allow and protect 2 in order to achieve 1.
To conclude, a lack of economic conscience is the root cause for economic inequality but wealth redistribution by a dominating state is not the solution. Rather, a lack of conscience is a lack of awareness, ultimately of values. Specifically, for a long time we have been unaware that the market has become so manipulated to the detriment of society. We’re slowly waking up, realizing that we’re in this together and something is brewing. But unlike the proverbial frogs in the pan, not only do we now notice that it’s getting uncomfortable, we can also do something about it. Inequality is a symptom of the imbalances within the economic system. This condition is exemplified by a market embodying an unhealthy mind brainwashed by a flawed paradigm, constrained by politicized interference, and one that is increasingly reflecting artificial ‘intelligence’. In short, the market suffers from mental disorders and the growing number and seriousness of symptoms should alert us, in reference to Böhler, to restore our “sense of balance”. It should also raise our trust in inter-subjectively making decisions on “values” in the market to compensate for the current over-reliance on institutionalized decisions on “actions” in the market. In fact, the egocentric ‘pass the buck’ mentality has been largely executed via ‘kick the can’ actions, postponing the eventual realization that we have to decide on doing ‘good’ by setting the market free.
I realize that my view on inequality does not match that of the majority. But I suspect Jung and Böhler would agree.
This document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors. The information in this document is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. This document is accurate at the time of writing but can be subject to change without notification.
Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3 Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorized and regulated by the Financial Conduct Authority (FCA reference no: 144267). Kames Capital plc provides segregated and retail funds and is the Authorized Corporate Director of Kames Capital ICVC, an Open Ended Investment Company. Kames Capital Management Limited provides investment management services to Aegon, which provides pooled funds, life and pension contracts. Kames Capital Management Limited is an appointed representative of Scottish Equitable plc (Company Number SC144517), an Aegon company, whose registered office is 1 Lochside Crescent, Edinburgh Park, Edinburgh, EH12 9SE (PRA/FCA reference no: 165548).
1 https://www.cnbc.com/id/101046937
2 https://www.cnbc.com/id/101068112
3 Others who have recently analysed inequality include Angus Deaton, Pierre Rosanvallon, and David Stockman.
4 Böhler, Eugen, 1970. “Conscience in Economic Life”. In Conscience (Studies in Jungian thought); Editor James Hillman. Evanston: Northwestern University Press.
5 Akerlof, George and Rachel Kranton; 2010; Identity Economics; Princeton University Press. However, they favour state intervention to create equality, contrary to my arguments below.
6 This is based on the primacy of numerical archetypes, something I explain in my thesis and elsewhere.
7 I argue this in more detail in my thesis. Such training, involving new tools and techniques, can develop a competitive “creativity” edge in a world increasingly dominated by algorithms. Furthermore I condition my arguments, for example, via Jung’s psychological types.
8 Finance and the Good Society. See also George Gilder’s Knowledge and Power.
