– June 29, 2015

A common put-down of economists is that they know the price of everything but the value of nothing. This pithy comment encapsulates two very different views of money, and can be helpful in understanding how to resolve the Greek financial crisis.

Adam Smith, regarded as the father of economics, took a moral view of money. For Smith, money was about being able to have a decent standard of living, or being able to “appear in public without shame.” He supported government regulation of lending rates because he feared that lenders would take unfair advantage of the destitute. Following the Smithian view of money, we developed bankruptcy laws that let people (and business firms) escape from crushing debt, and survive without this debt hanging over them.  

The philosopher Jeremy Bentham adopted a more economic perspective. He thought that Smith’s moral view of money was inconsistent with his laissez-faire economics, where people determined what was best for them, and markets determined what was best for the economy overall. Bentham pointed out that usury laws limited individual freedom and had bad economic consequences: Lenders would not lend at low rates, and so we had less investment and spending. The economic view of money states that bankruptcy laws encourage reckless behavior and speculation, since if something goes wrong there is a simple out.

Understanding these two views of money is crucial for understanding the Greek tragedy whose last act will take place this week in Brussels (unless everyone agrees to kick the can down the road for another few weeks).

On one side stands the so-called troika (the European Union, the IMF and the European Central Bank). They have lent Greece a lot of money and, holding an economic view of money, expect to be repaid. Also, they don’t want to create incentives for other countries to default on their loans.

On the other side stands the Greek people. Greece’s official unemployment rate currently exceeds 25 percent; it has averaged more than 20 percent during the 2010’s. Incomes have fallen by more than 15 percent over the past decade, and people fear not being able to afford necessities like food, shelter and medical care.

This dire situation explains why the Greek people elected a leftist government, the Syriza party, to say to the troika: “No more austerity, we have suffered enough.” Given their electoral mandate, Syriza is seeking debt relief while appealing to a moral view of money.

Aristotle, the ancient Greek philosopher, remarked that virtue was usually a mean between extremes. A virtuous Aristotelean solution would be for the troika to write off some of the Greek debt and restructure the rest. This would enable the Greek economy to grow somewhat and the troika to get repaid somewhat. But because the two views of money contradict one another, instead of a virtuous last minute compromise, we are likely to see Greece default, leave the Euro and return to the drachma.

Since we have little real-world experience with situations like this, predictions about the consequences of a Greek default and exit from the Euro run the gamut from the very small to the catastrophic. What actually happens will be determined mainly by psychological factors rather than economic factors. Will a fear of bad consequences, or of additional government defaults, hinder borrowing and spending? Will investors flock to the safety of U.S. Treasuries, pushing up borrowing rates for other nations?

With the world economy still trying to recover from the Great Recession, the last thing we need is another economic calamity creating uncertainty and turmoil. We can only hope for a compromise position on the two views of money. But as a card-carrying member of the dismal science, I am not optimistic. 

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Steven Pressman

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