Filed under: brave new world | Tags: A Short History of Financial Euphoria, financial euphoria, intelligence, John K. Galbraith, leadership, money
The great economist James K. Galbraith describes two factors that contribute to financial euphoria – the special fiscal insanity that has led to more than one collapse of markets, the most spectacular being the great collapse of 2008.
The first contributing factor, in paragraph no. 1 below, is a systemic aversion to history; and the second factor, in paragraph no. 2, is the mistaken belief that financial success can be connected to intelligence.
There is a brilliant description of the Peter principle in paragraph 2: CEOs are mentally predictable, intellectually unchallenging, cavers. The system that supports them is soft, uncritical and in the end error prone.
Our market fundamentalists are just as inbred and parochial as our religious fundamentalists.
Here is Galbraith:
Contributing to….euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again…they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery…There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of the those who do not have insight to appreciate the incredible wonders of the present.
The second factor contributing to speculative euphoria and programmed collapse is the specious association of money and intelligence…In all free enterprise (once called capitalist) attitudes there is a strong tendency to believe that the more money, either as income or assets, of which an individual is possessed or with which he is associated, the deeper and more compelling his economic and social perception, the more astute and penetrating his mental processes…In practice, the individual or individuals at the top of these institutions are often there because, as happens regularly in great organizations, theirs was mentally the most predictable and, in consequence, bureaucratically the least inimical of the contending talent. He she, or they are then endowed with the authority that encourages acquiescence from their subordinated and applause from their acolytes and that excludes adverse opinion or criticism. They are admirably protected in what may be a serious commitment to error.
— John K. Galbraith, A Short History of Financial Euphoria
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