Regulating Culture: Navigating Economies

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The Libor scandal at Barclays and other systemically important banks is just a recent example of what has become, since 2008, a familiar narrative.  A financial institution or class of institutions fails spectacularly.  The institution, which after all is custodian of a great many very human interests -- finance is a critical way in which we moderns confront our hopes and fears for the future -- requires intervention, and quite often, the use of tax money.

Upon examination, it becomes obvious that institutional disaster was largely self-inflicted.  Certainly Barclays got itself into this mess.  More generally, we have seen numerous institutions that were just badly operated.

This is not supposed to happen.  Finance is highly regulated.  Evidently, however, the rules that are supposed to prevent calamity failed.  Rules were either disobeyed or subverted or simply did not address the risks taken by the institution.

So more, and putatively more sophisticated, rules are drafted.  But a certain weariness has set in; it is difficult to believe that the new rules won't be subverted as well. 

What seems to be lacking in such institutions is a willingness to play by whatever the rules are, a willingness or perhaps capacity on the part of market participants to make financial capitalism work.  The culture of regulated institutions seems to be lacking in what might be called commercial virtues: thrift, prudence, trustworthiness, and the like.

Many members of various elites, including finance, believe that commercial virtues have been eroded in relatively recent years, that the practices of a generation ago were substantially more ethical -- or at least more prudent -- than the practices leading into present day crises, including the misrepresentation of Libor.  While the desire for wealth is not new, even the leaders of prominent financial institutions, who have most to gain from continuation of the status quo, concede that something changed in their companies, and on their watch. 

This story of decadence and decline is interesting in part because it is told and believed not by the usual anti-establishment critics, but by the very business leaders who should be most interested in the maintenance of sound business practices, and the ethos that supports such practices, to say nothing of prestige.   But captains of financial industries are complaining that their ships are not very well run.

And so recent years have seen an enthusiastic focus on the need to establish, or reestablish, ethical culture in business institutions.  In the wake of scandal at important financial institutions, legislatures have established commissions that issue lengthy reports decrying perverse the perverse institutional cultures that allowed the scandal to happen.  Called before investigative committees, business leaders acknowledge that their culture has degenerated like a wayward graduate student, and promise to straighten up.  Sometimes, business leaders even sign manifestos pledging to make "culture" or "ethics" a central concern of the company, maybe even more important than profit.  And so forth.

Regulators might willingly concede that better institutional cultures are required, but how is "culture" to be assessed, measured, produced, or required?

To be blunt but not unkind, few of the business world's calls for a better financial culture, a new ethos, reflect serious thought about culture.  Most calls for "culture" merely express a rather inchoate sense that the wave of scandals and failures of financial institutions are symptomatic of a deeper malaise.  Certain critically important elites no longer seem to work together very well, and certainly do not work well for the benefit of the broader society.

Culture is not an asset that can simply be acquired.   Nor should culture be understood as something apart, to be measured and regulated by those somehow without culture.  To judge a culture (as should be familiar from art), regulators must participate in it.  So the question becomes, how do we begin to think seriously about what is possible for the financial culture that informs our understanding and even our discontent?

Libor provides a specific example.  Most proposals for reform treat Libor as if it were a device like a thermometer that directly measured an aspect of the natural world, and Barclays and others tampered with the instrument, so that it gave an inaccurate reading. 

But Libor never measured anything outside the social context of its formation.  As every teacher knows, at the end of the day, performance on a test is always about the test and maybe the class, but only tangentially about the truth. 

Libor wasn't untrue in the way that a faulty thermometer is inaccurate.  Libor was untrue in the sense of dishonest.  Asked "what do you believe," players lied.  In general, people do not wish to play with liars.  That is, the virtue at issue is not the mechanical one of accuracy, but the moral one of honesty. 

This is the sort of self-referential question that reflexive cultural anthropologists have been considering for some time, often in the context of finance.  Perhaps usefully, ethnographers have increasingly turned to their interlocutors -- actors in complex sites like major banks -- for help in approaching such questions.   "Paraethnography" denotes the use of an actor's articulation of her context in order to get a handle on that context.

Regulators could adopt paraethnographic perspectives to begin to understand the management of financial institutions.  Instead of superficial compliance with endless checklists, cf. Haldane's critique of Basel III, regulators could simply ask to be convinced that a bank's practices were adequately sound.

Adopting a paraethnographic perspective would transform the relationship between bankers and their regulators from antagonism to mutual interdependence.   Bearing in mind that taxpayers bear the ultimate risks of financial failure, regulators would be dependent on bankers for sound information.  Bankers would be dependent on regulators for authority to conduct business, and in extreme cases, for lender of last resort functions.

From this perspective, the bifurcation between public and private, between the government and business, would be replaced with far more nuanced views about acceptable behavior in authoritative institutions. 

Paraethnographic regulation is likely to be more enforceable than regulation currently is.  Within such mutually interdependent relationships, the sorts of scandals that have become to seem banal would be seen as betrayals of trust.  Adoption of a paraethnographic view of financial regulation should lead to a far more tough minded willingness to discharge inadequate managers, and even to liquidate firms that abused the privileges of their role in the economic order.

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