Markets of the mind

Debt and guilt have much in common. It’s time we found better ways of organising both ourselves and the economy.

Tony Curzon Price
Tony Curzon Price
25 May 2015

Credit: All rights reserved.

Feeling guilty and being over-indebted have much in common. You've done something wrong and now you're paying for it. The feeling of guilt is a flow of pain due to you from past recklessness, maybe from your original sin. The flow might abate if only you could redeem yourself. You're all set up to beg forgiveness. A payment is due, and if only you'd do your duty, you'd pay your dues, the pain might just abate. The language of guilt and debt seem inseparable: redeem, forgive, bondage, dues...

George Gilder, onetime business guru, evangelical Christian and speechwriter to Richard Nixon, was a prophet of the virtues of massive debt for companies. His logic would have appealed to the protestant theologian and autocrat John Calvin. When you pile a company high with debt—up to the maximum that its financial projections will allow—the chief executive will have just one purpose to his day: to fulfill his promises; to meet the monthly installment. And if he doesn’t (it usually is a ‘he’), he'll have to confront a stern and wrathful investor. That investor is, in Goldamn Sachs CEO Lloyd Blankfein’s entirely non-ironic formulation, “Just doing God's work.” To make the payment or else ... that's exactly the motivational structure of the guilty mind: there'll be hell to pay if I don't perform.

Here's the trick to God’s work: you give the executive a good salary and an equity stake—the promise of life after the toil and hardship below. That makes life on the right side of judgement pretty good now and excellent in prospect. You've got a lot to lose. But if you miss the debt payment, it's a sign you have not been chosen. There might be other chances for redemption, but you've fluffed this one.

If you're burdened with sin—mental debt—you’ll need to pay your dues to your stern and angry God (your banker), or face the punishment. The payment—your good behaviour, your endeavour—keeps your banker off your back until the next installment. But you’ve still got the debt. 

One of Gilder's favourite companies was WorldCom. Remember their story? It too could only wish the slate were wiped clean.

It's truly a morality tale. WorldCom piled on the debt to build fiber networks to light up the Internet. Gilder—investor and judge—beheld his servant Worldcom and loved what he saw. Every month, the payments came in. Regular as clockwork. Every signal said that this was truly a company that could be trusted with the transformation of the world.

It made a financial projection and it kept hitting it, month after month. Until the day that investors discovered that the company had been lying. Or rather, it had deluded itself. Its accounts had booked as current revenues the promise of revenues far in the future. When these failed to materialise, WorldCom just booked yet more fanciful sales as revenues today, to keep the day of judgement away. But your maker does not wait forever. The delusional state was revealed. WorldCom filed for bankruptcy and its executives went to jail.

The guilty soul can also ‘do a WorldCom.’ It enters delusional psychosis—a state of salvation, of having been forgiven. The guilt is unbearable…unless…unless the representation of reality can be made to be other than it is. Unless the books can be cooked. That’s the final let-out: the world is magically transformed; the repayment has been made. The part of the company that is meant to raise a truthful mirror to its maker (the accounting department) becomes corrupted. The deluded transform their reality as their last refuge.

Gilder’s right, in many ways, about the power of debt. The ability to repay becomes the canary in the mine. The investor does not need to know or understand much about the company—just can it make its payments? If it can, it’s a good company and might eventually be rewarded. If it can't, it will be punished.

The debt contract, requiring so little real work from the investor, extends the power of finance no end. Each economic transaction requires little work to be monitored and controlled: the very act of being able to repay becomes most of the monitoring you need to do. And if the repayment falters, then you take a closer look. You examine the covenants you signed. You might decide to exercise control.

And so with guilt and the scope of authority. A sense of sin, of having to redeem yourself through deeds, is the banker in the head. Guilt regulates human behaviour in the same way that debt regulates the behavior of the firm. Just as the stern arm of the investor is extended through the debt contract, so the stern arm of God is extended through guilt.

Debt and guilt are powerful tools. I'm not saying they should never be used. If it's vital that power be delegated to someone or some group whom we don't quite trust, then debt can be the right contract. Debt opens up capital resources to those beyond the circle of tribal loyalties. With a nod to William Shakespeare, Antonio can go to Shylock to finance Bassanio’s profitable suit. Venice prospers and innovates in finance.

As The Economist explains in this week’s leader, we have tax systems that favour debt over equity: a company is not taxed on the interest it repays, but it is taxed on any profits it returns to shareholders. After tax, a company can make a £1 million loan go further than £1 million from a shareholder who'll participate directly in the ups and downs of the venture. The leveraged buy-out industry and huge swathes of private equity and banking have grown in the niche created by this tax wrinkle.

Why do we favour debt over equity and guilt over sympathy? It extends the domain of control of the stern judges, and that might be enough of an explanation.

But maybe there is more: a mind shaped by sin and guilt will feel comfortable—at home even—in a debt contract. And if you’re in debt, you can make sense of your plight through the notion of sin. Guilt is a market in the mind and it paves the way for markets in the world, while the economy provides a model for how the mind can be organised. Debt really does motivate through fear; it can super-charge the economy. Burdened by debt, the company does more than is natural to make its next payment. The guilty person is always striving to keep their judge at bay.

I want to repeat: the debt contract sometimes makes sense. If a vital interest is at stake, we must all pay our dues, and debt/guilt can be a very efficient way to get there. Even in Ursula Le Guin’s anarchist utopian economy of "The Dispossessed", when famine strikes, it is right for everyone to bend their will to the common good. Maybe guilt played a part in that, and maybe it should.

But let’s recognise the damage that’s done from too much reliance on the debt/guilt system:

  1. Everything must be made to seem like a vital interest is at stake to maintain the feverish pitch of endeavour.
  2. Debt and guilt crowd out other ways of organising collective endeavours and of motivating people—we reduce the realm of human possibility

Who benefits from all the endeavour created by debt and guilt? In most cases, not the indebted or the guilty so much as the creditor or the figures behind the frightening God.

When we see the damage done to others by so much of that endeavour—in the case of debt-fuelled growth, to the environment, to the vulnerable, to all that could have been instead; in the case of guilt, to self-realisation—we find the real reason to resist the marketising of the mind and the guilt-priming of the economy. 

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