I guess the paperback version of Michael Lewis's Flashboys is coming out, so we're doing that thing where we revisit a book a year later to have the same conversation over again.
Actually -- in this updated discussion at the BBC news site, I was stuck by how the conversation not only hadn't moved forward but actually seemed to have congealed. I was also amazed by how this brief piece brings up so many central issues in conceptual thinking about economics, most of which we covered before.
1) Fairness versus efficiency
The standard measure in typical economics reasoning is efficiency of some kind. It can mean several different things, but all of them are some version of improving or maximizing how things are overall.
The philosophical knock on efficiency is that it's incompatible with justice and fairness. As E. F. Carritt put it decades ago, the pursuit of efficiency requires us to forget rights, to forget justice, and "to dump happiness whereever we most conveniently can."
Lewis and other critics say HFT creates a "rigged" marketplace that is unfair to investors. So from a philosopher's point of view, it's very amusing to see HFT defenders explicating in response that HFT has "brought efficiency to the market."
In one way, this reads like a complete non-sequitor, as if you'd been complaining about a stomach ailment and your doctor praised your hearing. In another way, it echoes centuries of debate over ethical reasoning: is it just overall efficiency that matters? Or is fairness a real thing?
2) Incentives for what?
Lewis says of HFT:
"When the incentives are screwed up the behaviour is screwed up ... "And it creates a culture where screwed up behaviour is normal, it is even praised because it increases profits... Unless you change the incentives, you won't change anything else."
All these statements seem plausible to me. But what's the criteria for screwed up versus non-screwed up behavior in trading anyway?
From where I sit, the whole idea of spending your day inputing decisions into a computer about something amorphous and trying to do it better than other people feels completely bizarre as a way to spend your time.
Even accepting that there could be a non-screwed up concept of trading, what makes "trying to be faster than the other guy" screwed-up? I'd have thought it was on a par with any other strategy for doing any other thing when you're engaged in some competition with some other people. Run out the clock. Pass the ball when the blitz is on. Try to be faster than the next guy. From what normative perspective are any of these any more screwed up than anything else?
3) What is the point exactly?
This question of screwed-up versus non-screwed up behavior brings us naturally to the question: what is the point of the whole practice? In professional sports, the rules are there to maximize entertainment. But what's the point of the finance enterprise?
From the rhetoric you'd think there was this clearly defined reason the practice exists from which you could deduce what's a "good" incentive for "good" behavior and what isn't. But what's good behavior? What's the whole thing there for in the first place?
Just as I was searching for a concise and clear way to suggest how profoundly iffy the whole thing is, the New York Times went ahead and did it for me, in a Sunday editorial by a Harvard economics professor, who argues that while the finance industry could, in some possible world, engage in activities that promote social value, at this point it's mostly just an elaborate kind of rent-seeking.
Of course, this being Harvard and the NYT, the solution to that problem isn't some massive overhaul of the whole system or doubt about the whole capitalist project -- no, it's just reminding your students how great personal "idealism and inventiveness" are.
As always in 21st-century America, the response to systematic ethical problems is an injunction to improve your personal morals.
2 comments:
"As E. F. Carritt put it decades ago, the pursuit of efficiency requires us to forget rights, to forget justice, and "to dump happiness whereever we most conveniently can.""
Now I understand why I dread the future.
The socially useful function of finance is to channel capital to productive uses, and to dampen risk (by diffusing it). Nothing in High Frequency Finance serves these functions. It is just a way for some individuals to make money. The same goes for other practices of modern finance, such as finding patterns in the behaviour of other players (say, that they buy X on Fridays) and then exploiting these patterns to make money (say, temporarily cornering the X market on Thursday night).
I think there *is* a legitimate point to the finance enterprise. The interesting and hard question is how to regulate it so that it ends up serving its intended function, as opposed to facilitating the enrichment of a few individuals to the detriment of its social purpose.
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