Are Democracy and Capitalism in Conflict? Economic History in Small Doses 2

By Girish Menon*

The answer is yes. Unlike what a lot of people believe capitalism and democracy clash at a fundamental level.

 Democracy runs on the principle of ‘one person one vote’. The market (a euphemism for capitalism) runs on the principle of one rupee one vote. Naturally, the former gives equal weight to each person regardless of the money s/he has. The latter gives greater weight to richer people. Therefore, democratic decisions usually subvert the logic of markets.

 Most 19^th century liberals opposed democracy because they thought it was not compatible with a free market. They argued that democracy would allow the poor majority to introduce policies that would exploit the rich minority, thus destroying the incentive for wealth creation.

 Influenced by such thinking, all of today’s rich democracies, historically, gave voting rights only to those who owned more than a certain amount of property or earned enough income to pay more than a certain amount of tax. The election result in British India, often quoted to justify the traumatic partition, was based on votes by a subsection of the population.

Communists, who reject the ‘one dollar one vote’, were not known for their conduct of free and fair elections either.

 On the other hand, money can be a great leveller. It can work as a powerful solvent of undesirable prejudices against people of particular races, social castes or occupational groups. The fact that the openly racist apartheid regime in South Africa gave the Japanese ‘honorary white’ status is a powerful testimony to the liberating power of the market.

 Unfortunately, leaving everything to the market will result in the rich being able to realize the most frivolous element of their desires, while the poor may not even be able to survive.

 Moreover, there are certain things that should simply not be bought and sold – even for the sake of having healthy markets. Judicial decisions, public offices, academic degrees are a few such examples.

 Democracy and markets clash at a fundamental level.  They need to be balanced. Free markets are not good at promoting economic development despite what their proponents argue.

* Adapted and simplified by the author from Ha Joon Chang's Bad Samaritans - The Guilty Secrets of Rich Nations & The Threat to Global Prosperity

Why Karl Marx was right

Lee Sustar explains why mainstream economists are referring to Karl Marx in discussions of the world economy--and why they won't talk about the whole Marx.

September 13, 2011

ECONOMIST NOURIEL Roubini, whose predictions of the financial crash of 2008 earned him the nickname "Dr. Doom," has referred his patients to a specialist in capitalist crisis: Dr. Karl Marx.

In an interview with the Wall Street Journal, Roubini said:

Karl Marx had it right. At some point, capitalism can destroy itself. You cannot keep on shifting income from labor to capital without having an excess capacity and a lack of aggregate demand. That's what has happened. We thought that markets worked. They're not working. The individual can be rational. The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else's income and consumption. That's why it's a self-destructive process.

For several hours on August 12, the Journal website ran the video of the interview as a top story, under the headline, "Roubini: Marx was Right."

Considering that the first edition of Marx's three-volume masterwork Capital appeared in 1867, Roubini's revelation isn't exactly news to socialist opponents of capitalism. But given the intractable nature of the current crisis--a deep global recession, a weak recovery in the traditional core of the system in the U.S. and Europe, and now the possibility of a lurch into a second recession--mainstream, or bourgeois, economics has been exposed as ideologically driven and incapable of offering solutions.

Stimulus spending, championed by liberal followers of the economist John Maynard Keynes, was in full swing two years ago. It staved off total economic collapse after the financial crash, but failed to produce a sustained boom and led to big government budget deficits.

That opened the door to the free-market champions of the so-called Austrian economic school of Friedrich von Hayek, who argued that slashing spending was key to an economic revival--only to see such measures choke off growth in Europe and, more recently, the U.S.

But in August, stock markets gyrated worldwide amid a worsening European debt crisis, a near-stall in U.S. economic growth and a slowdown even in China, home of the world's most dynamic big economy. Suddenly, the ideological crisis that accompanied the 2008 crash was palpable once more as the world system appeared on the brink of a new recession.

- - - - - - - - - - - - - - - -

ROUBINI, A professor at New York University, made his name--and quite a bit of money--by telling the unvarnished truth to Big Capital before the Wall Street meltdown hit. He's done so once again, this time referring to Marx for an explanation.

In his interview with the Journal, Roubini argued that the U.S. economy is flagging because business is hoarding cash--more than $2 trillion by one estimate--rather than investing it in factories, new equipment and hiring workers. As he put it:

If you're not hiring workers, there's not enough labor income, enough consumer confidence, enough consumption, not enough final demand. In the last two or three years, we've actually had a worsening, because we've had a massive redistribution of income from labor to capital, from wages to profits.

That shift has taken place not during the crisis, but during the recovery, as economist David Rosenberg pointed out earlier this year when he noted that the "labor share of national income has fallen to its lower level in modern history," 57.5 percent in the first quarter of 2011, compared to 59.8 percent when the recovery began. While that might seem like a small change, given the $14.66 trillion size of the U.S. economy, it's huge.

In alluding to this trend, Roubini is apparently referring to Marx's observation about a central contradiction of capitalism. "The consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist class," Marx wrote in Capital Volume 3. "The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses."

It's wrong to assume, Marx contended, that capitalists limit their investments during a crisis because "the absolute consuming power of society" has reached its limit. On the contrary, the unemployed want jobs and workers desire a higher standard of living as the slump wears on.

But during crises, capitalism can't deliver, even when business has plenty of capital to invest. That's because capitalists won't put their money into building factories and offices and hiring workers--as Roubini pointed out--unless they have a reasonable chance of making a profit. Otherwise, they sit on their money.

"The capital already invested is then, indeed, idle in large quantities," Marx explained. "Factories are closed, raw materials accumulate, finished products flood the market as commodities. Nothing is more erroneous, therefore, than to blame a scarcity of productive capital for such a condition."

The result, Marx wrote, was both a "superabundance of productive capital" and "paralyzed consumption"--a fairly accurate description of recent trends in the U.S. economy.

- - - - - - - - - - - - - - - -

THE BIGGER questions are these: Why do such capitalist crises come about at all? And why are some downturns in the economy mild recessions, while others generate protracted crises, like the Great Depression of the 1930s or the "depression-with-a-small-d" that's gripped the world economy since late 2007?

Marx wasn't the first to observe what today's mainstream economists call the "business cycle"--the economic slumps that take place every few years. His contribution was to delve into the reasons for that pattern. He concluded that the internal contradictions of capitalism doomed the system to periodic, highly destructive crises.

The root of these crises is in the unplanned and competitive nature of capitalist production. For the capitalist, what matters isn't meeting social needs, but obtaining the maximum profit. If obtaining profit is possible from producing a life-saving medical device like a heart pacemaker, that's fine. But if more money can be made by producing junk food or nuclear weapons, greater investment flows into those industries instead.

Meanwhile, competition puts capitalists under constant pressure. They have to make sure that workers produce goods in as little time as possible--at what Marx called the "socially necessary labor time" required to produce a particular commodity. Otherwise, more efficient capitalists will drive them out of business. Thus capitalists are constantly compelled to invest in labor-saving machinery to cut production costs.

That is the secret of capitalist profitability. For example, new technologies may allow workers to produce enough to cover the costs of their wages in, say, just three hours instead of the four needed previously. The result is an increase in labor time spent working just for the capitalist--increasing what Marx called "surplus value," which is the source of profits.

But a portion of surplus value must also be reinvested in the production process. Refusing to do so is not an option for capitalists--who live by the rule of eat or be eaten. To the capitalist, Marx wrote in Capital Volume 1, the motto is:

Accumulate, accumulate! That is Moses and the prophets!...save, save, i.e., reconvert the greatest possible portion of surplus-value, or surplus-product into capital! Accumulation for accumulation's sake, production for production's sake: by this formula classical economy [the original bourgeois economics] expressed the historical mission of the bourgeoisie, and did not for a single instant deceive itself over the birth-throes of wealth.

The drive to accumulate is blind and chaotic. As Roubini recognized, "markets aren't working" because what is rational for an individual person or corporation--the maximization of profit by pushing down labor costs--can be irrational for the system as a whole.

During the upswing of the business cycle, the problems are largely hidden. As long as profits are high and credit is available, companies can borrow to invest in new production and hire new workers. Pundits proclaim that recessions are a thing of the past.

But even as production expands, profits are squeezed as new entrants flood the market. Companies go bust, which hits their banks hard. The banks, in turn, raise interest rates or simply refuse to lend, which triggers further bankruptcies. Factory closings and mass layoffs ensure--and, in the modern era, job cuts hit the public sector as tax revenues decline.

In the section of Capital Volume 3 quoted above, Marx described how the crisis can seem to erupt out of nowhere. Thanks to the extension of credit, he wrote:

[E]very individual industrial manufacturer and merchant gets around the necessity of keeping a large reserve fund and being dependent upon his actual returns. On the other hand, the whole process becomes so complicated, partly by simply manipulating bills of exchange [i.e., checks and promises of future payment], partly by commodity transactions for the sole purpose of manufacturing bills of exchange, that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash.

Marx's description of how credit could delay, but then exacerbate, a crash applies to the financial debacle of 2008, which involved no small amount of the kind of manipulation and swindling Marx saw in his day. Set aside the toxic alphabet soup of today's financial assets--CDS, CDO and MBS--and Marx's analysis of the role of bankers sounds familiar: "the entire vast extension of the credit system, and all credit in general, is exploited by them as their private capital."

The development of credit, in turn, helps expand capitalist production beyond the capacity of the market to absorb new commodities: "[B]anking and credit...become the most potent means of driving capitalist production beyond its own limits, and one of the most effective vehicles of crises and swindle."

But Marx also stressed that the credit crunch is actually a symptom of problems in the underlying productive economy. He wrote in Capital Volume 2, "[W]hat appears as a crisis on the money-market is in reality an expression of abnormal conditions in the very process of production and reproduction."

- - - - - - - - - - - - - - - -

THERE ARE longstanding debates among Marxist economic theorists about just how capitalist crises play out in general and their manifestation in different historical periods.

Marx identified a long-term tendency in the rate of profit to fall--the result of the constant pressure to invest in technology to replace workers, who are the source of surplus value. But capitalists have been able to counteract the falling rate of profit in various ways--for example, by destroying unprofitable capital through highly disruptive means, ranging from bankruptcies to wars like the Second World War, which ultimately was the most important reason the system finally overcame the Great Depression and was launched into a postwar boom.

In the 1970s, severe slumps returned to the world system as a revived Europe and Japan, along with several newly industrialized countries, emerged as more effective competitors to the U.S. But the restructuring of uncompetitive industries, free-market policies and corporate globalization opened the way to a new boom in the 1990s, when the U.S. declared that its "miracle economy" was the model for the world.

Ultimately, however, the economic expansion of the 1990s set the stage for a new crisis--one that Marx would have recognized. In the Communist Manifesto, written in 1847, years before he undertook a systematic study of the system, Marx and co-author Frederick Engels noted that capitalism's drive to expand led to crises of overproduction--of too many goods to be sold at a profit:

In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity--the epidemic of overproduction. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce...

And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.

That passage still has the ring of truth. It was capitalist overproduction on a world scale in the 1990s that set the stage for the 1997 East Asian financial crisis and the recession of 2001. But by dropping interest rates to rock bottom, the Federal Reserve was able to postpone the real day of reckoning for the U.S. for nearly a decade. Cheap credit and the housing bubble kept American consumers spending and the number of Asian factories growing, even if the number of manufacturing jobs in the U.S. continued to decline during the 2002-2007 expansion.

As we now know, banks were happy to make the loans for mortgages and then pass them along to Wall Street, which bundled them into securities that later turned toxic. When even a limited number of sub-prime loans started to go bad, a credit squeeze quickly destroyed investment banks Bear Stearns and Lehman Brothers. Nouriel Roubini, who had been warning about all this for years, was suddenly a business celebrity--and even Karl Marx made the financial press.

The bad debts of that era of casino capitalism continue to weigh down the world economy. Yesterday's toxic assets held by private banks have morphed into today's government budget deficits, thanks to the no-questions-asked, multitrillion-dollar bailouts in the U.S. and Europe.

And the global crisis of overproduction is still unresolved. In the U.S., the capacity utilization rate for total industry was 77.5 percent in July, some 2.2 percentage points above the rate a year earlier, but 2.9 percentage points below the average for the period between 1972 and 2010. That's unmistakable evidence of a depressed economy--and it's what Roubini was talking about when he cited "excess capacity" and mentioned Marx.

With mainstream economists fresh out of ideas about how to overcome the crisis, perhaps it shouldn't be surprising that Marx made news even in Rupert Murdoch's Wall Street Journal. But don't hold your breath waiting for a follow-up Journal headline: "Capitalism Isn't Working: Socialism is the Alternative." That part is up to us.

‘We Only Postponed The Day Of Reckoning’

Economist-cum-technocrat Deepak Nayyar is viewed as an influential observer of the economy and a selective critic of liberalisation. He was the chief economic advisor to the government during the tumultuous period between 1989 and 1991, when India negotiated with the International Monetary Fund. In a rare interview, Nayyar—emeritus professor of economics at the Jawaharlal Nehru University in Delhi—took questions from Sunit Arora published in Outlook India:

Sunit Arora: Professor Nayyar, is India facing a balance of payments crisis?

Professor Deepak Nayyar: We are indeed in a crisis. In the past three months, confidence has been strongly undermined. India’s balance of trade deficit (10 per cent of GDP) and current account deficit (4.8 per cent of GDP) are both at levels that are unsustainable in terms of fundamentals. If you compare this with the past in India, or the present in other emerging economies, you would recognize how serious the situation is. It is as clear as daylight that we cannot continue to live beyond our means year after year.

But why has the mood shifted from abject despair to seeming euphoria?

The panic lifted when US Federal Reserve Chairman Ben Bernanke announced in mid-September that he was going to defer the progressive withdrawal of quantitative easing. It was not the magic wand of Raghuram Rajan at RBI that stabilized the rupee It was this exogenous event in the US! Essentially, the problem lies in our flawed strategy of using foreign (portfolio) investment inflows to finance the current account deficit. Given this approach, we must be prepared to accept the ebbs and flows of global finance. However, we cannot claim we are victims of global finance. Of course, most emerging economies were hurt by Bernanke's decision. But we chose this path. And our fundamentals are distinctly worse 

What do you think is an appropriate value of the rupee?

The rupee was somewhat over-valued at Rs 55/$ . We have had high inflation for three years, much higher than in the outside world. Hence, this needed to be corrected. But the sinking to Rs 70/$ was too much of a correction. Clearly, there is no assurance the rupee will remain at current levels of Rs 62/$. When the Federal Reserve Board meets next, it is almost certain that they will announce a phased withdrawal of quantitative easing. There could then be a repeat performance of capital outflows from India. It is simply a matter of time. We have only postponed the day of reckoning.

The government continues to insist that we don’t need to go to the IMF.

"It would be prudent and wise to explore seeking an arrangement with the IMF—even if this cannot be in the public domain for obvious political reasons.”

The government cites two reasons for their comfort: the exchange rate has stabilized, and foreign exchange reserves at $275 billion are large enough. The exchange rate could slip again. And the comfort implicit in these reserves is illusory. Simply put, short-term debt and liabilities that can be withdrawn on demand are much larger than our reserves. The private corporate sector has to repay $ 170 billion before end-March 2014. And the outstanding stock of portfolio investment is much larger. If there were to be capital flight, just as we had in 1990, the reserves would vanish—and vanish quickly. In the past, many countries in Latin America, East Asia and elsewhere have lost more than $100 billion of foreign exchange reserves in a fortnight during financial crises.

So, do we need to go to the IMF?

It is important to recognize that the IMF simply does not have the resources to finance such large current account deficits let alone combat capital flight. But the IMF is a lender of last resort. Its imprimatur tends to stabilize confidence in international financial markets. The government must recognize that the present situation is at least as serious, if not worse, than what it was in 1990-91. In these circumstances, it would be both prudent and wise to explore the possibilities of an arrangement with the IMF, even if this cannot be in the public domain for obvious political reasons. The government must recognize that terms are always better before a crisis implodes, and always much worse thereafter. Obviously, this would be a back-up plan, tactical rather than strategic, should the need for contingency finance arise. The government must also explore alternative emergency financing possibilities such as swap arrangements with other central banks.

How would you rate the UPA’s management of the economy?

The macro-management of the economy during the tenure of UPA-II leaves much to be desired. The management of the balance of payments situation has been poor. This problem, which has been building up for three years, should have been addressed much earlier—with the same urgency as the government is doing now. The early warning signals were all there but were quietly ignored.

If you were Chief Economic Advisor, what would you have advised the government?

The irony of my life is that, in the late 1980s, I wrote about the macroeconomic crisis to come, but I was at the epicentre trying to manage it when it surfaced (in 1990-91). If I had any association with the government, starting 2009, I would heard these alarm bells. For one, I would have begun to act on accelerating rates of inflation. For another, I would have done something to ensure that the balance of trade deficit, hence the current account deficit, did not climb to these unsustainable levels. These problems did not surface overnight. For more than three years now, inflation has been gathering momentum and the balance of trade deficit has been rapidly ballooning.

Why hasn’t the UPA been able to tackle persistent and high inflation for the past three years?

“I am opposed to Raghuram Rajan’s plan to allow global banks to buy Indian ones. Banking plays a critical role in countries latecomers to industrialisation.”

I think that both the diagnosis and the prescription of the government on inflation has been wrong. The government has simply raised interest rates time and time again. This has ended up stifling domestic investment. But it has done nothing to combat inflation. Hiking interest rates would moderate inflation if rising prices are driven by excess liquidity. But when inflation is driven by supply-demand imbalances, adverse expectations, or segmented markets, monetary policy cannot address the problem. It is no surprise that it has not. Indeed, theory and experience both suggest that, beyond a point, raising interest rates does not combat inflation, just as lowering interest rates cannot stimulate investment. The persistent inflation has hurt people most of whom do not have index linked incomes. Come election time, this resentment will translate into a protest by voters against incumbent governments, wherever they are, because people hold governments accountable for inflation. The real problem now lies in the credibility of the government, now much diminished, because that is what shapes confidence, perceptions, and expectations. It is possible—although as a citizen I sincerely hope it does not happen—that markets might decide, without waiting for the people to decide at election time. If a macro-economic crisis does surface before the election, then markets would have decided on the economic performance of the government even before the people have had an opportunity to do so.

So you feel the crisis could re-appear…?

It is possible. It serves no purpose to be alarmist. Yet, it is important to be a realist. I do not see any evidence of a real turnaround, at least so far, on any of the criteria—trade deficit, current account deficit, inflation, savings, investment or growth—that shape underlying fundamentals. The only silver lining is the good monsoon. The paradox is the skyrocketing prices of food in what seems to be an abundant monsoon. The depreciation of the rupee is going to compound the problem. Imports are 25 per cent of GDP so that a 10 percent depreciation directly pushes up the wholesale price index by 2.5 percentage points, while indirect pass-through effects could add a further 1 plus percentage points.

Shifting tracks, what is your view on Raghuram Rajan’s statement on recasting norms for allowing international banks to buy Indian ones?

My view is clear. I am opposed to it. I would wish to exercise strategic control in the banking sector as it has a critical strategic importance in countries that are latecomers to industrialization. Evidence available for the past ten years, which reveals a significant decline in the share of manufacturing in GDP and in employment, suggests that there is a danger of de-industrialization in India. I would argue that the time has come for India to think of strategic industrial, trade and technology policies. There is no country that has industrialized without strategic forms of intervention. The fetishism about liberalization is overdone. It is a means of increasing the degree of competition in the economy. But its pace and sequence must be calibrated. We cannot lose sight of the ends. Industrialization is an imperative because that is our potential comparative advantage.

What is your view on the corruption scandals around the allocation of scarce natural assets?

As a concerned citizen, I can only express anguish and anger at such a blatant sharing of the spoils between the state and some corporate entities. The metaphor , crony-capitalism, is an apt description. Public Private Partnerships (PPPs) are just rhetoric. For one, there is so little progress. For another, it might simply socialize the costs and privatize the benefits. Where is it going to lead us, say in infrastructure?

Finally, where do you weigh in on the Amartya Sen versus Jagdish Bhagwati debate?

I followed the debate, but it is a red herring that poses false dilemmas. Both are concerned with outcomes—growth or equity—but neither is concerned with processes, which requires thinking about transition paths or journeys to the destination. Most importantly, we need growth with equity. Is it possible for us to promote growth when you have a State that is incapable of regulation? Similarly, is it possible for a state that cannot deliver even basic public services to implement good redistribution programmes? Efficient markets need effective governments.

Emerging market rout threatens wider global economy

The $9 trillion (£5.8 trillion) accumulation of foreign bonds by the rising powers of Asia, Latin America and the emerging world risks going into reverse as one country after another is forced to liquidate holdings to shore up its currency, threatening to inflict a credit shock on the global economy.

Fears of Fed tightening have pushed borrowing costs worldwide to levels that could threaten global recovery Photo: AFP

By Ambrose Evans-Pritchard in The Telegraph

8:38PM BST 22 Aug 2013

India’s rupee and Turkey’s lira both crashed to record lows on Thursday following the US Federal Reserve releasing minutes which signalled a wind-down of quantitative easing as soon as next month.

Dilma Rousseff, Brazil’s president, held an emergency meeting on Thursday with her top economic officials to halt the real’s slide after it hit a five-year low against the dollar. The central bank chief, Alexandre Tombini, cancelled his trip to the Fed’s Jackson Hole conclave in order “to monitor market activity” amid reports Brazil is preparing direct intervention to stem capital flight.

The country has so far relied on futures contracts to defend the real – disguising the erosion of Brazil’s $374bn reserves – but this has failed to deter speculators. “They are moving currency intervention off balance sheet, but the net position is deteriorating all the time,” said Danske Bank’s Lars Christensen.

A string of countries have been burning foreign reserves to defend exchange rates, with holdings down 8pc in Ecuador, 6pc in Kazakhstan and Kuwait, and 5.5pc in Indonesia in July alone. Turkey’s reserves have dropped 15pc this year.

“Emerging markets are in the eye of the storm,” said Stephen Jen at SLJ Macro Partners. “Their currencies are in grave danger. These things always overshoot.” 

It was Fed tightening and a rising dollar that set off Latin America’s crisis in the early 1980s and East Asia’s crisis in the mid-1990s. Both episodes were contained, though not easily.

Emerging markets have stronger shock absorbers today and largely borrow in their own currencies, making them less vulnerable to a dollar squeeze. However, they now make up half the world economy and are big enough to set off a crisis in the West.

Fears of Fed tightening have pushed borrowing costs worldwide to levels that could threaten global recovery. Yields on 10-year bonds jumped 47 basis points to 12.29pc in Brazil on Thursday, 33 points to 9.72pc in Turkey, and 12 points to 8.4pc in South Africa.

There had been hopes that the Fed might delay its tapering of bond purchases, chastened by the jump in long-term rates in the US itself. Ten-year US yields – the world’s benchmark price of money – have soared from 1.6pc to 2.9pc since early May.

Hans Redeker from Morgan Stanley said a “negative feedback loop” is taking hold as emerging markets are forced to impose austerity and sell reserves to shore up their currencies, the exact opposite of what happened over the past decade as they built up a vast war chest of US and European bonds.

The effect of the reserve build-up by China and others was to compress global bond yields, leading to property bubbles and equity booms in the West. The reversal of this process could be painful.

“China sold $20bn of US Treasuries in June and others are doing the same thing. We think this is driving up US yields, and German yields are rising even faster,” said Mr Redeker. “This has major implications for the world. The US may be strong to enough to withstand higher rates, but we are not sure about Europe. Our worry is that a sell-off in reserves may push rates to levels that are unjustified for the global economy as a whole, if it has not happened already.”

Sovereign bond strategist Nicolas Spiro said India is “caught between the Scylla of faltering growth and the Charybdis of currency depreciation” as hostile markets start to pick off any country with a large current account deficit. He said India’s central bank is playing with fire by reversing its tightening measures to fend off recession. It has instead set off a full-blown currency crisis that is crippling for companies with dollar debts.

India is not alone. A string of countries across the world are grappling with variants of the same problem, forced to pick their poison.

Forget Europe – the markets hold the real unaccountable power

An unholy matrimony between finance and politics has undermined democracy: it's time it was reinforced

• 
• • Mark Serwotka
  • guardian.co.uk, Thursday 24 January 2013 19.30 GMT

'We still have the tin-hatted Conservatives with no heart, their Lib Dem counterparts without the brains to realise they’re sealing their own fate, and a Labour party still lacking the courage to put up a real fight' … The Wizard of Oz at West Yorkshire Playhouse. Photograph: Tristram Kenton

Listening to economics being discussed in the media is like being read a fairy story. In any fairy story you need a monster, and in this case it's "the markets": unseen, but seemingly all-powerful. Job losses, public service cuts, wage freezes, privatisation, even cuts to benefits for disabled people can be justified by saying "the markets" demand it.

But what are the markets? Who comprises them and why are they so powerful? I didn't vote for them and I doubt you did either – yet they apparently have the power to dictate policies to elected governments and, in the case of Italy, to even select the government.

This is not an abstract debate. If we are to understand the economic system we live under, what went wrong to cause the crash, and how we are to change it, we need to deal with facts, not myths. At the height of the crash the curtain was pulled back, Wizard of Oz-like, to reveal the markets as nothing more than a cabal of rich men serving their own interests.

Yet sadly, we still have the tin-hatted Conservatives with no heart, their Lib Dem counterparts without the brains to realise they're sealing their own fate, and a Labour party still lacking the courage to put up a real fight.

If people don't understand these things, they are susceptible to the argument that "there is no alternative" and that the medicine of austerity is unpalatable, but necessary.

Do you remember when in 2007 people queued outside hospitals desperate to remove their loved ones from the unsafe hands of doctors and nurses, or when in 2008 the entire public sector stood on the precipice due to the excessive greed of jobcentre workers and teachers?

No? Because it never happened. Yet the myth that the public sector caused the crash was allowed to develop, and the dangerous conclusion allowed to take root that hacking back the public sector would solve the crisis. It hasn't and it won't – as even the IMF is beginning to realise.

The myth-making, the diversionary tactics, the crash and our failure to recover from it is the story of how the finance sector came to be lauded by all major political parties.

But it also had another effect, to undermine democracy. The unholy matrimony between finance and politics jettisoned public interest in three key ways:

Firstly, deregulation. Successive governments created markets for the finance sector by removing restrictions on what the sector could do. By the crash, the regulators barely understood the complex structures they were supposed to be regulating.

Secondly, it redistributed wealth to the rich. Through slashing corporation tax and the higher rate of income tax, the super-rich grabbed an even larger share of the national wealth. This meant more wealth accumulated to fewer and fewer people. Instead of funding public services – starved of cash during the Thatcher years – more of British capital poured into the City of London.

The third and final element was privatisation. Entire industries – from the railways and telecommunications, to gas, electricity and water – were taken out of collective public ownership. This transferred power over them from the ballot to the wallets of a few, the directors and shareholders who have extracted billions from them.

This week David Cameron made a speech about the need to repatriate powers from Europe. Sections of the press and Ukip leader Nigel Farage rant incessantly about the alleged influence of Brussels over our lives, but that pales into insignificance compared to the unaccountable power of the large financial institutions.

So a few vocal Little Englanders have forced the prime minister to respond to their agenda. When what we really need is to assert our democracy over the tyranny of the markets, in the interests of the many.

Europe's top industrial firms have a cache of 240m pollution permits

European Commission estimates energy-intensive sector will have accumulated allowances worth €7-12bn by the end of 2012

Damian Carrington
guardian.co.uk, Sunday 19 June 2011 15.38 BST
larger | smaller

ArcelorMittal steel worker
Steel producer ArcelorMittal tops the list of firms with surplus of emissions trading permits, according to thinktank Sandbag. Photograph AP

Some of Europe's largest industrial companies gained billions of euros from the carbon emission rules they lobbied fiercely against, new analysis reveals today.

Ten steel and cement companies have amassed 240m carbon pollution permits from generous allocations, according to a report by Sandbag, the carbon trading thinktank, seen by the Guardian.

The free permits, granted to companies with a market value of €4bn (£3.5bn), can be sold or kept for future use. The European commission estimates that the entire energy-intensive sector will have accumulated allowances worth €7bn-€12bn by the end of 2012.

"More and more businesses see that Europe's future lies in a highly efficient economy with low pollution," Baroness Worthington, Sandbag's founding director, said. "But a small group of carbon fat-cat companies are trying to stop this, in spite of making billions from a windfall of free pollution permits."

The steelmaker ArcelorMittal leads the list of companies in the report, with a current surplus valued at €1.7bn, followed by Lafarge, the cement group.

Tata Steel, in third place with a surplus valued at €393m, last month announced 1,500 job losses at its plants in Lincolnshire and Teesside, blaming emissions regulations as well as the economic downturn. Karl-Ulrich Köhler, chief executive of Tata Steel Europe, said at the time: "EU carbon legislation threatens to impose huge additional costs on the steel industry." Tata Steel declined to comment on the report.

The European Union emissions trading scheme (ETS) puts a cap on the carbon pollution emitted by energy and industrial companies. Those reducing their emissions can sell their spare permits to those who do not. But a combination of initial over-allocation by national governments and the economic decline has left the steel, cement, chemical, ceramic and paper sectors with many more permits than they need. The industries have lobbied hard against calls from governments including the UK for the tightening of the ETS and other emissions targets.

Eurofer, the lobby group representing all of Europe's steelmakers, said last month: "To remain competitive in the free, global steel markets, European steel needs … legislation that does not harm its competitiveness. But we are gravely concerned that EU climate change policy will do precisely that."

Cembureau, which lobbies for the cement industry, takes a similar line, stating: "It would be irresponsible to shift the [emissions] goalposts."

In the UK, the government has proposed incentivising low-carbon innovation by setting a British floor price for carbon from 2013. But this is opposed by the CBI. John Cridland, the director general of the employers' group, said: "It risks tipping energy-intensive industries over the edge."

The government has made some concessions, promising to produce plans later in 2011 to compensate businesses for any competitive disadvantage.

However, independent analysis by Bloomberg New Energy Finance found that the carbon permits held by the steel industry would cover its emissions for the next 12 years. "If the steel sector [on aggregate] did not sell any of its surplus, it would not have a need to purchase emissions until 2023," said Guy Turner at Bloomberg NEF.

The Sandbag report, based on public data, also found that nine of the 10 "carbon fat cats" bought between them 24.4m permits from the cheaper international market, mainly from companies in China and India. These can be used within the EU's trading scheme, enabling companies to retain the more valuable European ETS permits. Furthermore, despite the European companies claiming that tougher emissions rules would drive business overseas, some were paying overseas steel and cement companies for their international carbon permits.

"Purchasing carbon offsets from foreign competitors would not seem to be the actions of businesses genuinely concerned that the ETS will drive business abroad," said Worthington.

Not all companies are resisting the tightening of the European ETS. Five major energy groups, including Britain's Scottish and Southern Energy, last week called for spare permits to be withdrawn, a proposal supported by Sandbag.

"Failure to do so could severely hamper business incentives to invest in low-carbon technologies, as the price signal will be skewed in favour of fossil-based solutions," their statement said.

The Guardian contacted all the companies named by Sandbag. Those who responded argued that the surplus permits arose from decreased production and might be needed when the economy recovered. They said that without protection, steel and cement making would be driven to countries with less CO2-efficient manufacturing practices. Many called for global regulation of emissions

A spokesperson for ArcelorMittal said: "As part of our corporate responsibility strategy, we have decided that any sale of such surplus allowances will be reinvested into projects aimed at the improvement of our energy efficiency footprint, as this will help to reduce our overall CO2 emissions."

Erwin Schneider, at the steelmaker ThyssenKrupp, said: "Companies make decisions based on expected future developments. Any earnings from the past will either have been reinvested already or paid out to shareholders. Therefore it seems to be very misleading to use historic numbers to address our future position."

Testosterone and high finance do not mix: so bring on the women

Gender inequality has been an issue in the City for years, but now the new science of 'neuroeconomics' is proving the point beyond doubt: hormonally-driven young men should not be left alone in charge of our finances…

Tim Adams
Tim Adams
The Observer, Sunday 19 June 2011


Brokers Continue To Trade During Financial Turmoil
Panic hits the trading floor in October 2008. Photograph: Peter Macdiarmid/Getty Images

For the past few weeks I've had two books by my bed, both of which offer a first draft of what history may well judge the most significant event of our times: the 2008 financial crash. Read together, they are about as close as we might come to a closing chapter of The Rise and Fall of the American Empire. As literature, one of them – the final report of the Financial Crisis Inquiry Commission of the US Treasury – doesn't always make for easy reading: there are far too many nameless villains for a start. And, quite pointedly, there is not a heroine in sight. Reading the report I became preoccupied by, among other things – the fairy steps from millions to billions to trillions, say – the overwhelming maleness of the world described. The words "she", "woman" or "her" do not appear once in its 662 pages. It is a book, like most historical tragedies, written about the follies and hubris of men.

The other book, an entirely compulsive companion volume, is Michael Lewis's best-selling The Big Short, which Google Earths you into the crisis. Rather than looking at a global picture, it lets you into the bedrooms and boardrooms of the individual corporate men who catastrophically lost billions of dollars and, on the other side of those bets, the extraordinary ragtag of obsessive individuals who saw what was coming and made eye-watering fortunes. It gives the crash a human face, and once again that face is universally male.

The books are linked by more than subject matter, though. Lewis, a one-time bond trader himself – he left, 20-odd years ago, in incredulity and disgust to write his insider's account, Liar's Poker – gave evidence to the Crisis Inquiry Commission over the course of its 18-month sitting. In the end, however, he refused to sign off the report; and not only did he refuse to sign it, he also refused to put his name to the dissenters' addenda to the report, which three of the committee insisted upon. And not only that, he did not add his name to that of the single individual who insisted on a further addendum stating that he dissented from the dissenters' view. Lewis was not a fan of the report.

The reason for this was simple, he suggested. He felt that the committee, for all its considered judgment, had not understood, from the outset, a single, pivotal word. That word was "unprecedented". Though the inquiry had set out in the belief that the crash was an event different in kind to anything that had gone before, it nevertheless proceeded to judge it in the terms of previous crashes. What it failed to do, in Lewis's eyes, was this: it neglected to look for the things that might have changed in Wall Street or the City, the things that might have made individuals on the trading floors act in ways that were seen to be entirely, unprecedentedly, reckless. When he came to consider these things himself, Lewis felt that perhaps chief among the unprecedented novelties was this one: women.

"Of course," he observed, with tongue firmly in cheek, "the women who flooded into Wall Street firms before the crisis weren't typically permitted to take big financial risks. As a rule they remained in the background, as 'helpmates'. But their presence clearly distorted the judgment of male bond traders – though the mechanics of their influence remains unexplored by the commission. They may have compelled the male risk-takers to 'show off for the ladies', for instance, or perhaps they merely asked annoying questions and undermined the risk-takers' confidence. At any rate, one sure sign of the importance of women in the crisis is the market's subsequent response: to purge women from senior Wall Street roles…"

When I first read those remarks it was not clear how much in earnest Lewis had been when he made them. Subsequently, though, I heard him speak at the London School of Economics, and he took this idea in a slightly different direction. When asked what single thing he would do to reform the markets and prevent such a catastrophe happening again, he said: "I would take steps to have 50% of women in risk positions in banks." Pressed on this, he went on to suggest how science reveals that women in general make smarter decisions regarding investment than men, that when it comes to money, women in couples are demonstrably better at evaluating risk than their partners, and single women much better still.

Though those of us males who have an uncanny sense of money always slipping through our fingers might anecdotally believe this to be true, I was surprised to hear it stated as a fact. It seemed to beg a number of questions. First, if women really are better at making these judgments, why is it always men, still, without exception, who troop out before select committees to explain where it all went wrong, and how they weren't really to blame. And second, would it really be different if women were in charge?

You don't have to look too far into the science to realise that Lewis's claim, in broad terms, stands up. The first definitive study in this area appeared in 2001 in a celebrated paper that broke down the investment decisions made with a brokerage firm by 35,000 households in America. The study, called, inevitably, "Boys will be Boys" found that while men were confident in making multiple changes to investments, their annual returns were, on average, a full percentage point below those of women who invested the family finances, and nearly half as much again inferior to single women.

A more recent study of 2.7 million personal investors found that during the financial crisis of 2008 and 2009, men were much more likely than women to sell any shares they owned at stock market lows. Male investors, as a group, appeared to be overconfident, the author of this study suggested. "There's been a lot of academic research suggesting that men think they know what they're doing, even when they really don't know what they're doing." A fact that will come as a surprise to few of us. Men, it seemed, typically believed they could make sense of every piece of short-term financial news. Women, never embarrassed to ask directions, were on the whole far more likely to acknowledge when they didn't know something. As a consequence, women shifted their positions far less frequently, and made significantly more money as a result.

Naturally, if these findings were widely applicable, then it would be hard not to agree with Lewis's suggestion for reforming the sharpest end of capitalism. Rather than ring-fencing casino investment banks or demanding that high street banks hold vastly greater capital, as we heard at the Mansion House last week, wouldn't a safer model just be to hire more women?

To argue this case, you would probably need more than just behavioural evidence; you might need to understand some of the mechanisms which produced the trillion-dollar bad decision-making that led to what happened in 2008. In recent years, and particularly since the crash, a new science of such decision-making – neuroeconomics – has become fashionable in universities and beyond. It proposes the idea that you will create a better understanding of how people make economic choices if you bring to bear advances in neurobiology and brain chemistry and behavioural psychology alongside traditional economic maths models. Not surprisingly, neuroeconomics has plenty to say about the question of whether decision-making, in high-pressure situations, divides on gender lines.

The problem is that most of the scenarios used to investigate this divide are artificial. It is one thing attaching someone to an MRI scanner and telling him or her that a million pounds rests on their decision in a game; it is another when that person actually stands to lose a million pounds. Only one study, as far as I could discover, has had access to the brain chemistry, the neural biology, of young men actually working on trading floors. But the results it produced were nonetheless startling.

The study was led by a pair of Cambridge researchers. One, Joe Herbert, is a professor of endocrinology, and the other, John Coates, a research fellow in neuroscience and finance. Herbert, a specialist in the effect of hormones on depression, was fascinated to put some of his theories about the role of chemicals on decision making into practice. The curious thing about banks, he told me, "was that they know all about computers and systems and markets but they know next to nothing about the human machine sitting in the chair in front of screens making decisions. Nothing. We aimed to correct that just slightly."

It was Coates, though, who made the experiment possible. Having met Herbert at his lab in Cambridge, I met Coates in a pub in west London. He had a special advantage in gaining access to bond traders' brains, he explained: he used to possess one himself. Sharp-eyed and fit-looking, Coates retains the intensity of a man who used to run a trading desk on Wall Street during the dotcom bubble. He started off at Goldman Sachs and went on to Deutsche Bank. After some years trading, and making a lot of money out of a lot of money, he became increasingly fascinated by the way, during the dotcom years, the traders he worked alongside radically changed behaviour. They became, he says, "euphoric and delusional. They were taking far more risks, and were putting up trades with terrible risk-reward profiles". The dotcom was fun, in a way, he suggests; it was like the roaring 20s. "But I don't think anyone looks back on the housing bubble and laughs."

Coates was a relatively cautious trader himself, but there had been times when he too felt this surge, this euphoria: "When I had been making a lot of money myself, I felt unbelievably powerful," he recalls. "You carry yourself like a strutting rooster, and you can't help it. Michael Lewis talked about 'Big Swinging Dicks', Tom Wolfe talked about 'Masters of the Universe' – they were right. A trader on a winning streak acts exactly that way."

The second thing that Coates noticed was even more revelatory to him. "I noticed that women did not buy into the dotcom bubble at all," he says. "You couldn't find one who did, hardly. And that seemed like a pretty cool fact to me."

With this cool fact in mind, Coates began splitting his time between his trading desk and the Rockefeller University in Manhattan, which is perhaps the world's leading institute for the study of brain chemicals. There he started to become interested in steroids, and in particular something called "the winner effect". This occurs when two males enter a competition and their testosterone levels rise, increasing their muscle mass and the ability of the blood to carry oxygen. It also enhances their appetite for risk. Much of this testosterone stays in the system of the winner of a competition, while the loser's testosterone melts away fast; in evolutionary terms, the loser retires to the woods to lick his wounds. In the next round of competition, though, the winner already has high levels of testosterone, so he starts with an advantage, and this continues to reinforce itself.

"Steroids," Coates explains, "like most chemicals in your body, display what is called an inverted U-shaped response curve." That is to say, when you have low levels of them you lack vitality, and do very poorly at mental and physical tasks. But as the levels rise you get sharper and more focused until you reach an optimum. The key thing is this, however: "If you keep winning, your testosterone level goes past that peak and sliding down the other side. You start doing stupid things. When that happens to animals, they go out in the open too much. They pick too many fights. They neglect parenting duties. And they patrol areas that are too large." In short, they behave like traders on a roll; they get cocky.

Coates became convinced that this winner effect was what he observed in bullish trading markets, and what ended up dramatically distorting them. It also explained why women were mostly immune to the euphoria, because they had only 10% of the testosterone of men. What struck him most, though, was that, for all the literature about financial instability, economics, psychology, game theory, no one had ever clinically looked at a trader who was caught up in a bubble.

Coates wrote a research proposal. He came back to Cambridge where he had done his first degree, and because of his background eventually gained access, with Herbert, to a major City bond-dealing floor in London. They tested the traders for two hormones in particular, testosterone and cortisol (the anxiety induced, depressive "stress hormone"), and mapped their levels over a period of weeks against the success or failure of trades, individual profit and loss. Coates had imagined the experiment to be a preliminary study but the correlations he found – for evidence of irrationality produced by the winner effect and its converse – was "an absolute dream". They not only discovered that a trader's morning testosterone level could be used to predict his day's profitability. They also found that a trader's cortisol rose with both the variance of his trading results and the volatility of the market. The results pointed to a further possibility: as volatility increased, the hormones seemed to shift risk preferences and even affect a trader's ability to engage in rational choice.

Though the sample was limited, and suitable caution was needed in claiming too much, the correlations suggested that over a certain peak, testosterone impaired the risk assessment of traders. "And cortisol," he suggests, "was in some ways even more interesting than testosterone. We thought cortisol would rise when traders lost money," Coates says, making individuals more than usually cautious, "but actually it was going up incredibly when they were faced with just uncertainty. The stress hormones were switching over to emergency states all the time. There was an optimal level but these stress hormones can linger for months. Then you get all sorts of really pathological behaviours. If you are constantly prepared for high tension it affects your brain, and it causes you to recall stressful memories and become exaggeratedly risk-averse and kind of helpless."

Unfortunately this particular study ended in June 2007, before the full effect of the crisis, but its implications account, Coates believes, for some of what he subsequently heard from the trading floor. "If cortisol goes beyond a certain point, then it may become very difficult for traders to assess any risk at all. These guys are not built to handle adversity that well. There is an observable condition called 'learned helplessness', which if you are submitting to great stress over a long period of time makes you give up suddenly. Lab animals develop it: you open the cage and they won't escape. Traders have it too. They just slump in their chairs. In the crisis there were classic arbitrage opportunities as the markets were falling. Free money. But traders would sit there staring at the numbers and not touching it."

Since then, Coates has partly been working on the other strand of his original hypothesis, looking at the brain chemistry of women working in the markets. Because of the small sample sizes he has to work with – there were only three women out of 250 traders on the floor he first tested – the detail of that is far from complete, and he is properly reluctant to draw conclusions. What he will go so far as to say, though, is this. "Central bankers, often brilliant people, spend their life trying to stop a bubble or prevent a crash, and they are spectacularly unsuccessful at it. And I think it is because, at the centre of the market, you have these guys either ripped on testosterone or overwhelmed by cortisol so that they become completely price insensitive." Coates wrote a couple of articles after that research was published, suggesting that, if the winner effect was right, it was possible that bubbles were an entirely young male phenomenon. And if that were the case, then the best way of preventing boom and bust was to have more women and more older men – less in thrall to hormones – in the markets. "We know that opinion diversity is crucial to stable markets. What no one talks about is endocrine diversity, a diversity of hormones. The billion-dollar question is how to achieve it."

To most experienced, male, investment bankers, of course, this sounds like fighting talk. An old friend of mine, who traded his Cambridge English degree for an extremely lucrative life as a bond dealer, offered this, when I presented Coates's evidence to him. "It would be nice to think that having more female traders on the floor would make for less volatility," he said, "but that's wishful thinking. Financial markets are now global, so while we in the west might decide not to chase trends or react instinctively to breaking news because there are mature mothering types in boardrooms and sitting on risk committees, the rest of the world will, and our banks would lose out." And that's not all. "Many of the women I know who have managed money or have put capital at risk for banks have tended to be even more aggressive with risk than their male counterparts, as if perhaps to compensate for their supposed diffidence. Fighting their way through a male-dominated environment to a position in which they can invest/punt/ risk-manage, many women develop an ultra-masculine persona so as to be thought of as ballsy…"

Just a cursory glance through some of the recent spate of books and blogs written by young women who have worked in the City and lived to tell the tale would certainly seem to support this observation. Melanie Berliet, who worked as one of the only female traders in Wall Street, set the tone in her confessional blog: "If anything," she observed, "my token status gave me an extra thrill. I enjoyed being called a 'fucking dullard' or being instructed, patronisingly, to 'remove head from ass', because my reaction – to grin rather than cry – impressed the guys. I loved their attention and the daily opportunities to prove that I fitted in. What separated me from my colleagues was physical: my 5ft 9in, 120lb frame, my long, blondish hair – and my vagina. I had two options with my boss: trade sexual banter or resist. Typically, I chose the former. Like most traders, my base salary wasn't terribly high—$75,000 at the start of my third year. The bonus was all, and getting the right number rested on one thing, as I saw it: my willingness to promote my boss's fantasy of fucking me…"

John Coates doesn't believe the caricature, or at least he believes that in the upper reaches of banks, things have moved on. "A lot of my former colleagues are running divisions, or whole banks," he says. "I don't buy the sexist macho argument. The big investment banks desperately want women traders. But when they interview women who are qualified, the women don't want to do it…"

Neuroeconomics also starts to provide the answers to some of the reasons for that. Muriel Niederle is a professor at Stanford University, looking at gender differences in risk decisions. Over a period of years Niederle has developed clear evidence for the theory that though in non-competitive situations women demonstrate an advantage over men in making investment decisions, they either shy away completely from making those decisions in intensely competitive environments, or they respond less well than men to competition with very short-term high intensity and results-driven focus. This pattern is set, Niederle proves, from a very young age (and no doubt has a good deal to do with the differential presence of troublesome testosterone). Joe Herbert told me at his lab in Cambridge: "What is clear is that there are neurological differences between the sexes. Women, in very general terms, are less competitive, and less concerned with the status of being successful. If you want to make women more present, you have to remember two things: the world they are coming into is a man-made world. The financial world. So, either they become surrogate men… or you change the world."

Ah, changing the world. In the wake of 2008, there was a good deal of talk about that heady idea. Much of this talk concerned the creation of more gender balance in the city. The Economist coined the phrase "Womenomics" and argued that excluding nearly 50% of talent from crucial positions in business and finance was not only discriminatory but caused serious harm to stability and growth. Iceland's banks brought in women to clear up the mess that men had left. A good deal was made of the fact that the extraordinary success of microfinance in the developing world was because 97% of the loans were granted to women (men were – biologically? culturally? – not to be trusted). Science, neuroeconomics, was harnessed to develop some of those themes. And then, well, nothing. The commissions and the select committees decided that a return to something like the status quo, with all its implicit risks and inequalities, was the only option.

Womenomics still persists in a few places, however. The 30% Club was an initiative set up last November by executive women, and some senior men in FTSE 100 companies and accountancy and legal practices, to increase the number of women in decision-making and boardroom positions to that figure. It goes a little further than Lord Davies's recent report on the subject. But 30% is not an arbitrary number; it is thought – by neuroeconomists again, and through observation – to be the minimum proportion of women at the top of an organisation required to begin to change the culture; below that number, women tend to behave "like surrogate men"; above it, the subtle differences produced by gender might begin to influence the way decisions are made. In Britain there is still a good way to go: only 5.5% of executive directors in FTSE 100 companies are women (yet evidence shows that companies with women leaders have a 35% higher return on equity, and companies with more than three women on their corporate board have an 80% higher return on equity). On city trading floors, the percentage remains, for some of the reasons outlined above, at around 3% or 4%. Testosterone rules.

The country that has attempted most radically to change this balance is Norway, where a Conservative minister imposed a quota of 40% female directors in every boardroom. Most of the data suggests the initiative has been a great success, both culturally and commercially (though some, male, commentators argue that the turnaround is better explained by the spike in oil prices).

It would be hard to find many people in the city, even among women, who would favour quotas, though that argument can be made. John Coates, wearing his dealmaker's hat, suggests a practical solution. "The question is not whether men are risk takers and women are risk-averse. It is more what kind of risk do they want to take? My hunch is that women don't like high-frequency trading, so what you have to do is change the accounting period over which they are judged."

He then gives me a potted description of how things remain: "Say you have two traders. One trader makes $20m a year for five years, of which she might typically pocket a couple of million a year herself. At the end of five years she has made the bank the best part of $90m. Another trader makes $100m a year for four years. They don't want that guy to go off to a hedge fund so they let him take home $20m a year. But then in the fifth year – because of the winner effect – he loses $500m. That is essentially what happened in the financial crash. The bank has lost $100m and the trader has gained $80m. If you were judging these things over a five-year period, then you can see which person you would hire."

But, of course, that would require a very different idea of markets, and of money, to the one that is currently desperately being defended and remade. It would certainly require a greater degree of "endocrinal diversity". Still, the next time you hear someone suggest that things are getting back to "normal" in the city, and that we should at all costs start believing in exponential growth again, at least you can look him in the eye and state that you think his hormones might be playing up.
Neuroeconomics: Six things that the science of decision-making reveals

■ If groups of young men are shown pornographic pictures of women and then asked to choose between safe and risky investments, compared with men shown non-pornographic pictures they choose far riskier portfolios.

■ Our brains are designed to seek out novelty, but too much information can overwhelm them; we are generally better at assessing risk when listening to Bach than with the chatter of TV news.

■ Men's brains tend to shut down after they have proposed a deal, waiting for the response. Scans show that women brains continue to be active, analysing whether they have done the right thing.

■ Humans are the only animals that can delay gratification, a function of the prefrontal cortex. However, the prefrontal cortex only matures after the age of 30, and later in men than women. Before that, we are more likely to seek immediate gratification.

■ Our brains reward social interaction with the release of a chemical called oxytocin. It makes us feel good when we follow the herd. Stock market bubbles are one likely result of this.

■ Our brains are wired for human oxytocin-mediated empathy (or HOME). We are biologically stimulated to love (or hate) what is most familiar to us. We are built to form attachments, to value what we own more than what we do not own. This fact skews the rationality of all our investment decisions

Am I A Product Of The Institutions I Attended?

Amitabha Bagchi

I have been thinking for a while about how the institutions we affiliate ourselves to—or maybe our parents "admit" us to, or social pressures force us into—as students affect us, form us, shape us, turn our lives decisively down one of the many roads available to us. This question—Is what I am a product of the institutions I attended?—falls in the family of questions engendered by the basic question: What makes me who I am? This question, often asked before the perhaps more fundamental question—Who am I?—is not so easily answered. After all, our lives are produced by a complex interplay of factors, some determined in advance—race, class, gender, geography, personality, biology—and some random and contingent. The lens of science fails in the face of this complexity.

But the novelist, unlike the scientist, has a different relationship to questions. His job is not to answer them. His job is to put them into play. The unanswerable question is one of the basic tools of the storyteller's trade. Let me give you an example: Should Ram have made Sita take an agni parkisha because of what the washer man said? This question, so simple to state, is a vortex that begins spinning slowly, but then it widens and becomes stronger and stronger. As we argue and debate, it sucks in ship after ship of the fleet of human experience. What portion of a man's life is subject to his duty? How far does the power of love extend? What constitutes fidelity in a marriage? What is the nature of trust? Keep answering these questions, and like the asura Raktabija, who had a boon that every time a drop of his blood fell to the ground a new Raktabija would be born, a new set of questions emerges with each answer. The novelist's job, then, is to set questions into play, ornament them and lead them through the lives of people, and watch as they draw those lives into their fold.

And so as a novelist, I find myself asking this question—Am I a product of the institutions I attended?—in an attempt to open out a field of questions, in an attempt to add to the form of human knowledge that is full of errors and poetry, that form of human knowledge that is most intimate and personal.

Having used the P word—personal—let me start by saying that in the years since I left school I never thought that I would get an opportunity to thank NCERT for the impact it has had on my life. I could probably find a number of things to say in thanks, but let me just focus on one. In all my English textbooks since class nine I always found at least one story or play by a writer called William Saroyan. His stories of a young Armenian boy's life somewhere in the central part of California made a deep impression on me. In the years since, I have derived many things from those few stories I read. I learned that there is a deep sadness that lies right at the heart of the immigrant experience—something that the now fashionable generation of immigrant writers has never fully captured. I learned that a gentle kind of realism is the best way to describe the lives of people trying to live a dignified life in the face of hardship. I learned—and this is the one realization on which my brief writing career so far has rested, and, I suspect, whatever I write in future will also rest—that the strength of weak people is the stuff of literature. But it was only when I moved to California in 2002 that I learned that Saroyan is all but forgotten in his home country. That's when I really thanked the people who decided to put him into an NCERT textbook for almost every year since class nine.

Class nine was also my first year at a prominent school in South Delhi. Those of us who live in Delhi think of it as flat but every here and there we do come across small hills and this school is located on one such hill. So it happens that when I think back to this school and my days there I often find myself thinking of walking up an incline towards the large metal gates, manned by a chowkidar. I had been to other schools before that one, whose topography was as flat as the rest of the city's, but somehow when I think of school, I think of walking up a gentle slope, I think of a mass of grey boxy buildings sitting on a hill. Perhaps the fact that it is harder to walk up a hill than it is to walk on flat ground has something to do with it. When you reached those gates, there was an invisible membrane you passed through, like a scene from Star Trek where you stepped through a portal and you reached another dimension. Those gates were a valve, easily entered but hard to exit through. Those gates separated the world within the school from the world outside. Inside those gates we were safe from things we did not even know existed outside them. Within them lay a world of classrooms and corridors, playing field and Principal's office, labs and the library. And in each of these spaces there was a protocol, an acceptable way of carrying yourself, and an unacceptable way.

So school then is the place in which we learn what decorum is, and that each space has its own notion of decorum. But we learn this in what is to my mind the wrong way. We learn that decorum is linked to policing. That we should not be walking down a school corridor without an excuse during class time because a teacher may accost us. We learn that we should not talk too loudly in an unattended classroom, because someone may come in and drag us off to the Principal's office. And this structure of learning engenders another learning. We find those distant corners of the football field where cigarettes may be smoked. We figure out which shadows under which staircase are best suited for stealing kisses with our new love. We share stories of rules broken without consequence, we aspire to create narratives of ourselves as clever lawbreakers. We begin to value duplicity and deceit. Perhaps this process could redeem itself if it helped us lose our fear of authority. I have always believed that fear of authority causes psychic damage that diminishes human society, and that the social control we get in return does not justify what we lose. But the problem is that plotting and scheming to undermine authority because it is a subcultural imperative—as it becomes in these situations—does not rob us of our fear of authority. We remain fearful. And we become sly.

School was not only a spatial category, it was also a temporal one. School was the world of 7:40 am to 1:30 pm. It was a division of the first part of the day into neatly ordered chunks of time, never shorter than 20 minutes, never longer than 45. I have sometimes wondered about the daily routines, and their fixed nature. At first, rather unfairly, I used to think that social control was best enforced by controlling a person's time. Marx, in his own take on this matter, wrote about the centrality of the working day to the capitalist project. Not as theoretically developed as Marx's but I too had—and still have—a rebellious schoolboy's approach to the regimentation of time. But then I also began to think of it in another way. Is unplanned time as threatening as unmapped space? School, the place where space was made safe for us, was also a place where our time was organized for us: the day was chopped into a sequence of intervals, each interval to be used in a particular way.

I was one of those people who stayed on the straight and narrow, but in my school bus there were two older boys who revelled in informing students like me of their escapades. These escapades involved getting off the school bus just like the rest of us, but walking off in the other direction, through the government houses that neighboured our school, onwards to a South Indian restaurant on Rao Tula Ram Marg. They had their breakfast there, it took about half an hour, and then walked leisurely past Moti Bagh to the Sarojini Nagar railway station, reaching there around a quarter to nine. Then they boarded the Ring Railway that took about two hours to take them around the city and bring them back to where they began. Getting off the train they would head towards the now demolished Chanakya cinema, reaching in good time for the eleven o'clock show. That would last till around one pm, a convenient time to take a bus back to school, getting there just before the school bus left for home. It took me a while to realize that although these not-so-orderly schoolboys had rejected the school's way of organizing the morning hours, they had not rejected the notion that the morning hours needed to be organized.

Those two boys fell neatly into one category of the taxonomy we informally maintained in my academically oriented school. They were what were called bad students. After that category came good students and then brilliant students. There were other classifications too: some students were there to improve the school's results, some to fill its coffers and some to ensure that Delhi's political class looked upon our school favourably. But the various categories that we had in my school in Delhi—it was one of what we still call the "good" schools of Delhi—were to prove wholly inadequate when I graduated and found myself at college in IIT.

When I entered IIT Delhi in the early 90s, I happened to be assigned the same hostel that my cousin who had entered IIT in the middle of eighties had lived in. When given a choice between attending class and spending his time in the hostel's music room, I was told by some of my seniors who had known him, he preferred the latter. In this music room, he told me when I asked him, used to live a large collection of cassettes on which generation after generation of hostel residents had painstakingly recorded, from whatever source available, a fund of music that comprehensively represented the popular musical production of the American sixties and seventies. Rock musicians who were long forgotten in the US lived in recordings that were revered in our hostel at IIT. That music room formed the person he was, and the person he continues to be today. But, oddly enough, of the trove of music the music room had housed there remained but three tapes when I got there. I used to go there to study sometimes, because no one else seemed to have any use for that space. Outside that room, in the rest of the hostel, instead of long discussions over the superiority of Deep Purple over Led Zeppelin, now arguments raged between those who worshipped Madhuri Dixit and those whose hearts beat for Urmila Matondkar. In the common room next door, the newly installed cable TV was firmly tuned to the one or two channels that had discovered a business model built around twenty fours hours of Chitrahaar. Something had changed between the time my cousin had left and I had entered.

Today when Hindi soap operas command literally 20 times more viewer- ship than English programming, we know well enough the shape of the change. But at that time this churning was just beginning—obfuscated by pointless debates on the impact of cable television on "Indian culture". Each discipline—Economics, Sociology, Anthropology, Political Science—has its own explanations for this change. I myself think of it as the era in which the spread of coaching classes made it possible for people outside the metropolitan centres to succeed at the IIT entrance exam. At IIT we complain about the influence of the coaching class culture on the quality of our intake. But anecdotal evidence makes it amply clear that the rise of the coaching class culture meant the end of the dominance of English speaking elites from urban centres at IIT. The end of the dominance of people like me.

If someone were to look at the grade sheets from my first year they would conclude that I didn't learn much that year, but the truth of the matter is that I learned a lot. I learned, for example, that I loved carrom board and I was really good at it. I spent hours and hours playing carrom. In the process I made friendships with other people who spent hours and hours playing carrom. One day I was partnering a boy who was one year my senior, and we were playing against two others from his year. One of them, Gaurav, from a "good" school in Chandigarh, pointed to my partner and asked: Do you know what his name is? An odd question, I thought at that time. Of course I knew what his name was, I saw him every other day at the carrom room. His given name was Sumer Lal and his surname was one that I had learned by that time was shared by other people who got into IIT on the Scheduled Caste quota. "I know his name," I said. Gaurav, who hadn't a trace of any negative sentiment in his voice, said: "I didn't find out his name till the end of my first year." Gaurav, who probably became friends with the Rohits and Amits and Viveks within days of reaching the hostel, spent almost 12 months there before he learned Sumer Lal's name.

One of the interesting things we were all made to do during ragging was to read certain texts in Hindi written by a person whose name was always Mast Ram. The technical term for this literature was uttejak sahitya. We all had to read it, especially those of us who found it objectionable. I didn't find it objectionable, but for me a different task was assigned: I was made to translate it. Me and those few others who, the assigner of the task knew, would have trouble translating it. I knew the dirty words, that was not a problem, but I still struggled with the translation, stumbling over the heavily idiomatic language, the richly textured euphemisms that seemed to come so naturally to Mast Ram. It was probably the first time it struck me that my school Hindi textbooks had done me a disservice, and that the Hindi Cell style signage that I saw around the city was a total misrepresentation of a living breathing language. In those early days in the hostel, when I was keen to offer friendship to whoever IIT had arbitrarily chosen to put along with me in the hostel, I struggled to cross a barrier of language that my education in Delhi had created for me. But the people on the other side appreciated the fact that I did struggle, at least I think they did. And even if they didn't, several years later when I picked up and read end to end my first Hindi novel—Shrilal Shukla's Raag Darbari—I had them to thank for showing me that Hindi had a colloquial richness, a richness that would serve as a magnet for a person who loves language. And that magnetic attraction could take me to places I would not have otherwise chosen to go, shown me things about the country of my birth that I would not have otherwise chosen to see.

When I was in school my mother would sometimes go shopping at one of the prominent fresh produce markets of Delhi. On occasion we would stop at a South Indian dhaba that sat at the mouth of this market. Much to my astonishment some time into my stay at IIT I found that the dhaba was owned by the family of one of my closest friends at IIT—he is now a leading computer scientist in a prominent research lab in the US. I cannot forget the day he came to me, some time in our third year, and asked: "Bagchi, tu dose banaa letaa hai?" Before I could answer this question in the affirmative or negative he told me that his father was thinking of locking out the "labour" at the dhaba. "Ek do din maalik logon ko hi kaam karna padega." I nodded my agreement at the kind of prospect that I, the son of a civil servant father and schoolteacher mother, had never contemplated in my brief life. The thought of crossing the counter that I had sat on the customer side of sent a thrill up my spine. Unfortunately, or fortunately, the labour came around by that evening and I never did get to make dosas on the large tavas the dhaba had, but for a brief moment there I teetered at the edge of it, and I had to project out of my own world into another world where shop owners and labour squabbled while dosas waited to be made.

I cannot claim that the life I live now is fundamentally different in its everyday rhythms from the lives of the other English speaking students I went to school with. I cannot claim that what I learned in the years I was thrown into close contact with people who I had only seen from a distance before transformed me, because I have no way of knowing what I would have been like if I had not had that experience. But I do know that while I treasured what my teachers taught me at IIT—and treasured it enough to have joined their ranks today—I treasure equally, if not more, what I learned in the hostel's carrom room, in the canteen, in the corridors.

It is not my contention that we all learned to get along. Please do not think that I am trying to portray IIT as some happy melting pot of India's diversity. It was not that. It was as riven with casteism, communalism, classism, sexism and all the other ugly isms that our society nurtures. How could it not be? But by pretending that these things didn't matter, that exams and grades and job interviews were more important than all these things, it gave an opportunity to those who were willing to learn to get along with people who weren't like themselves. It gave a quixotic notion of an India populated by Indians a chance. Indians who were consumerist, over-ambitious, self-important technocrats perhaps, but who were, nonetheless, more Indian than anything else. And the fact is that this learning was not part of any of the curricula at IIT. But, as all of us who have been teachers for even a short while know, all we can do is give people an opportunity to learn. And if they don't learn, we can give them another opportunity, and another. Because the truth is that in a class of 100, there will only be four or five who get it the first time, only 10 or 15 who understand it in outline, and the remaining will take it in one ear and let it out of the other. I know people who still use the word "shadda" to refer to people who got into IIT through the SC/ST quotas, despite having played hard-fought games of volleyball in the same team as some of them, despite having stayed up long bleary-eyed hours preparing for exams along with them, despite having drunk too much and thrown up with them. Some people never learn. That is the teacher's frustration. But some people do learn and that is the teacher's reward. And, a priori, we teachers never know which is which.

It's a complex and random process, this interaction with young people that we teachers enter into for a living. It has many sides. Like so many other teachers I spend a lot of time thinking about my students, and, also like many other teachers, I don't spend enough time thinking about what they think of me. But when I do, I am forced to remember how I saw my teachers. Physically I saw them through a forest of dark haired heads—I always preferred to sit near the back of the class. I saw them standing up on the raised platform at the front of the class, on which the short looked tall and the tall looked taller. I took their careful grooming for granted—not realizing that if one of them turned up looking slovenly I would probably have been as upset or offended as the school's principal. I associated a certain amount of self-possession with them. And I thought of them as older. A small anecdote here: In class nine I entered a CBSE school and took Sanskrit instead of Hindi. My mother was concerned that I wouldn't be able to cope so she went to meet my teacher. Afterwards I asked her how the meeting went and she said: "Your Sanskrit teacher is a very sweet girl." I realized that my mother was probably fifteen or twenty years older than my Sanskrit teacher, and senior in the same profession, but still the idea that my teacher could be thought of, by anyone, as a "girl" was very difficult to comprehend. So difficult that I still remember that statement, long long after, I'm guessing, my mother forgot all about it.

So there you are, you poor teacher, frozen in eternal adulthood, even on those days when you wish you could just curl into a foetal position and suck your thumb instead of having to stand up and talk for an hour to a room full of young people who are looking at you, or at least should be looking at you. Sometimes in the nitty-gritty of the syllabus, the announcements about exams and homework, the clearing of the last class's doubts, you forget about the current that emerges from your body and flows out into the class. You forget what you mean to them.

I was lucky to have some excellent teachers at IIT Delhi, and I am not just saying that because some of them are my colleagues now. Let me explain with a story why I thought well of them. In my second year I had a class in computer architecture. Before the first semester exam, being somewhat lazy I didn't memorise certain assembly language keywords and their meanings. When the exam paper came there was one big question that involved explaining what a fragment of assembly language code did. It was impossible to answer without knowing the meaning of those keywords. One of my friends from the hostel who knew I hadn't memorised the keywords looked at me and snickered. Stung by this I decided to take a risk. I raised my hand and called the professor. "I don't know what these keywords mean," I said. He looked down at the paper, thought for a moment, then went to the board and wrote out the meanings of all the keywords. Right there, on the spot, he decided that this question was not a test of memory, it was a test of understanding. Not only did I snicker back at the friend who had laughed at me, I also never forgot the lesson. I apply it in my classes even today.

I knew from around the age of 19 that I wanted to be a professor. I was 30 when I actually became one. In those 11 years, especially towards the end of that period, I often used to daydream about the time when I would stand in front of my first class. When I dreamt about it I always saw myself standing in a particular lecture room at IIT Delhi, Block VI, Room 301, where most of my lectures in the latter part of my stay at IIT had been held. I would see myself standing up on the platform of VI 301 about to say my first words to my first class, and I knew I would be feeling something. I just didn't know what it was. As it turned out, my first teaching job was at IIT Delhi and when I got the room assignment for that first semester I found out that the class I was teaching would meet in VI 301. I walked up the one floor from my office, my stomach fluttering. I turned into that familiar door, carrying the attendance sheets, the sign of my authority, in my right hand, and walked onto the podium. I put the attendance sheets down on the table and turned towards the class. I looked up at them, seventy something of them, sitting in those long desks where I had so often sat and would never again sit. I looked at their faces and suddenly I ached at the pain they would feel in their lives. They sat there looking up at me, innocent to the suffering their future would bring them, and it came running through me, unexpectedly, this thought: There is so much you all will go through in your lives. Sometimes when I feel I am forgetting what my students mean to me and what I mean to them, I remind myself of that moment when I stood in front of my first class, that hot July day when I learned something about who I was and about the life I had chosen for myself.