The year end is fast approaching and it appears that the global financial crisis has being contained. Governments around the world stepped in to nationalize banks and insurance companies and invested heavily into their economies to keep them from collapsing. They played the role of the hero, just like Jack in the fairytale Jack and the Beanstalk.
The response of the government has been the same as a wise parent would have with misbehaving children. When highly-paid and highly-educated bank executives act as stupid as they have been, it appears completely rational to? provide oversight and limitations on their behavior. We are told that free market capitalism has been wholly discredited. Governments need to cut the roots of the problem, just like how Jack cut down the beanstalk in the fairytale.
Governments see themselves as having a role to protect citizens from harm including protecting the integrity of the economic system. They have a duty to the businesses and citizens who were hapless victims to the financial crisis just like how Jack had to defeat the evil Giant by by cutting down the beanstalk.
So we see an interesting parallel between the Jack and the Beanstalk fairytale and what took place in the 2008-2009 Financial Crisis. With a bit of play, we could suggest a parallel casting of:
Jack = Government
The Giant = The Large Financial Corporations who created the financial crisis
The Beanstalk = The Free Market
The Golden Goose = Corporate Profits, Employee Taxes, and Tax Revenues
As most people know, the fairy tale ends with Jack owning the Giant’s treasures after the Giant is killed. The fact that the Giant was systematically targeted, stolen from, and then killed calls into question the moral fibre of Jack. And in the same way, I also think that governments stepping in to save the economic system is wrong for the following reasons:
1) Jack Should Have Stayed Home = Government Needs To Mind Its Own Business
If you recall, Jack was the initiator of the entire story as it was he who went looking for mischief. Jack takes a marked non-heroic path by essentially breaking into the Giant’s home, stealing his most prized possessions, and ends up killing the Giant who rightfully pursues him at the end of the story. Jack intervened into the Giant’s life for his own benefit.
In the same way, the government is doing the same thing now. It is directly supporting certain businesses, yet letting others die. Because of its immense size, governments should not get involved with deciding which companies live or die. The free market works because it is dynamic and responsive. If a company makes too many mistakes, they go out of business. Yet the government is creating moral hazards in the marketplace by rewarding business mistakes with corporate welfare. This ends up tainting the benefits of the free market system.
Jack should have stayed home and not climbed the Beanstalk just like Governments should not get involved with rescuing companies.
2) Jack Depends on the Golden Goose = Government Depends on Taxes
Jack takes the Golden Goose from the Giant for himself. He has now acquired a means to secure his financial future because this magical creature lays precious golden eggs. Hooray for the hero but too bad for the Giant.
In the same way, Governments are dependent on the profits and wealth generated by the private sector. Governments need to pay for all of the employees, politicians, and public services, so they need a Golden Goose of their own. And in our world it is called Taxation. And it is not just the taxes that paid by public sector employees that counts here, since only true wealth generation and industry comes from the private sector as I had blogged before.
Jack claims the Golden Goose for himself just like how Government dependence on private wealth generation (including international trade) has it claiming ownership over the the marketplace.
3) Jack Does Not Know How to Care For the Golden Goose = Government Will Harm Itself By Intervening In The Marketplace
The Fairy Tale leaves us with the assumption that Jack lives happily ever after. He has the Golden Goose, the Magic Harp, etc. Yet what if the Golden Goose required a particular diet to help lay those golden eggs? How can we be sure Jack will know how to care for the Goose? The Giant who had been able to care for the Goose is now dead and cannot teach Jack how to care for the Goose.
In the same way, we see the Government intervening in the marketplace by punishing or saving certain Giants, they end up compromsing the results. Instead of allowing the market to decide who wins or loses, they are intervening in an attempt to change the outcome. This ends up doing more harm than good as evidenced by governments propping up capitalist/state-funded monstrosities such as General Motors.
Jack is not capable of caring for the special needs of the Golden Goose just as Governments are not capable of controlling the marketplace.
4) Killing the Giant Requires Killing the Beanstalk = Neutering or Propping Companies will eventually Poison the Marketplace
According to the story, Jack kills the Giant by cutting down the Beanstalk. He has to basically destroy the Beanstalk in order to topple the Giant to his death.
In the same way, we see the government intervening in the markeplace to stop the capitalists from making more mistakes. But by too strongly intervening into the economy they end up harming it. Governments fail to understand that business entities will be born, rise in power, and will one day end, but others will be there to replace them.
It is the way the natural world works and it is the way the marketplace works.
The problem is not that the Giant died, but that it was killed by Jack. The Giant, like the capitalists, is not evil, but is very dumb at times. They will over extend themselves and when they fall down, will leave quite a mess. But they will be replaced by another who will need to learn from its own mistakes in order to survive. Its an imperfect process that is a reflection of humanity’s own imperfection. It continues to astound me that as an imperfect species we hope to create a perfect system.
5) Jack Created the Mischief = Government Created the Roots of the Financial Crisis
Jack trades his cow for the magic beans and we know how the rest of the story unfolds, which is all set in motion by Jack’s mischief-making. Instead of minding his own business and doing what was asked of him, Jack gambled away the cow for something shiny.
In the same way, the governments contributed to the financial crisis by doing more than was asked of them. By creating an artificially low inflation/low-interest economy (they are the controllers of the interest rates) they encouraged a large number of investors to park their money in the more speculative investments. You can see how this all take place? in the brilliant video here.
Governments have now ran up huge budget deficits to save the economy because they were just as responsible for its collapse as the greedy and speculative investors. Like Jack, the Governments are not the hero of the story, but the cause of it.
I would end off by saying that Jack and the Beanstalk would have an entirely different meaning as a fairy tale if we saw it written from the Giant’s perspective and was called: Jack the Thief and Giant Killer. In the same way, holding people responsible for our financial crisis must not be isolated to greedy capitalists, but also to arrogant politicians that seek perfect outcomes.