Schumpeter: The dangers of demonology | The Economist

The dangers of demonology

HURLING brickbats at bankers is a popular pastime. The “Occupy Wall Street” movement and its various offshoots complain that a malign 1%, many of them bankers, are ripping off the virtuous 99%. Hollywood has vilified financiers in “Wall Street”, “Wall Street 2”, “Too Big to Fail” and “Margin Call”. Mountains of books make the same point without using Michael Douglas.

Anger is understandable. The financial crisis of 2007-08 has produced the deepest recession since the 1930s. Most of the financiers at the heart of it have got off scot-free. The biggest banks are bigger than ever. Bonuses are flowing once again. The old saw about bankers—that they believe in capitalism when it comes to pocketing the profits and socialism when it comes to paying for the losses—is too true for comfort.

But is the backlash in danger of going too far? Could fair criticism warp into ugly prejudice? And could ugly prejudice produce prosperity-destroying policies? A glance at history suggests that we should be nervous.

Scorn for moneymen has a long pedigree. Jesus expelled the moneychangers from the Temple. Timothy tells us that “the love of money is the root of all evil.” Muhammad banned usury. The Jews referred to interest as neshek—a bite. The Catholic church banned it in 1311. Dante consigned moneylenders to the seventh circle of hell—the one also populated by the inhabitants of Sodom and “other practisers of unnatural vice”.

For centuries the hatred of moneylending—of money begetting more money—went hand in hand with a hatred of rootlessness. Cosmopolitan moneylenders were harder to tax than immobile landowners, governments grumbled. In a diatribe against the Rothschilds, Heinrich Heine, a German poet, fumed that money “is more fluid than water and less steady than air.”

This prejudice has proven dangerous. Without money to grease them, the wheels of commerce turn slowly or not at all. Civilisations that have eased the ban on moneylending have grown rich. Those that have retained it have stagnated. Northern Italy boomed in the 15th century when the Medicis and other banking families found ways to bend the rules. Economic leadership passed to Protestant Europe when Luther and Calvin made moneylending acceptable. As Europe pulled ahead, the usury-banning Islamic world remained mired in poverty. In 1000 western Europe’s share of global GDP was 11.1% compared with the Middle East’s 8.6%. By 1700 western Europe had a 13.5% share compared with the Middle East’s 3.4%.

The rise of banking has often been accompanied by a flowering of civilisation. Artists and academics railing against the “agents of the Apocalypse” might also learn from history. Great financial centres have often been great artistic centres—from Florence in the Renaissance to Amsterdam in the 17th century to London and New York today. Countries that have chased away the moneylenders have been artistic deserts. Where would New York’s SoHo be without Wall Street? Or the great American universities without the flow of gold into their coffers?

Prejudice against financiers can cause non-economic damage, too. Throughout history, moneylenders have been persecuted. Ethnic minorities—most obviously the Jews in Europe and America but also the Chinese in Asia—have clustered in the financial sector first because they were barred from more “respectable” pursuits and later because success begets success. At times, anti-banking prejudice has acquired a strong tinge of ethnic hatred.

In medieval Europe Jews were persecuted not only because they were not Christians but also because killing them was a quick way to expunge debts. Karl Marx, who came from a Jewish family, regarded Jews as the embodiments of capitalism who could only be rescued from their ancestral curse through revolution. The forgers of the “Protocols of the Learned Elders of Zion” wanted people to believe that Jewish financiers were engaged in a fiendish global conspiracy. Louis McFadden, the chairman of the United States House Committee on Banking and Currency in the 1930s, claimed that “the Gentiles have the slips of paper while the Jews have the lawful money.” The same canards have been used against Chinese minorities across Asia.

This is not to say that the Occupy protesters are guilty of ethnic prejudice: they belong to a class and a generation that is largely free from such vices. But demonisation can easily mutate into new forms. In the August issue of the Journal of Business Ethics one Clive Boddy argues that the financial sector has been taken over by psychopaths: “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry”, lack a “conscience, have few emotions and display an inability to have any feelings of sympathy or empathy for other people”.

Caged emotions

Railing against the 1%—particularly when so many of them work for companies with names like Goldman Sachs and N.M. Rothschild—can unleash emotions that are difficult to cage. A survey in the Boston Review in 2009 found that 25% of non-Jewish Americans blamed Jews for the financial crisis, with a higher percentage among Democrats than Republicans. Ethnic hatreds are even rawer in parts of Asia. The Asian financial crisis of 1997-98 sparked murderous riots against rich Chinese in places such as Indonesia. Today, the combination of hard times and harsh rhetoric could also produce something nasty.

The crisis of 2008 showed that global finance requires tough medicine. Banks must be forced to hold bigger reserves. “Weapons of mass destruction” must be defused. The culture of short-term incentives needs to be revised. But demonising bankers will not solve these problems—and may well, if unchecked, bring a lot of ancient ugliness back to life.

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Schumpeter: The dangers of demonology | The Economist