Getting philosophical about economic meltdown

What happens when a big-time financial adviser supports a university center for the study of ethics in the department of philosophy? Among other benefits, you get a great discussion on the philosophical and ethical dimensions of the global financial crisis. That’s exactly what happened last week when Gary Parr, deputy chairman of Lazard and a much-sought financial adviser in the current credit crunch, discussed the economic collapse at UNC’s Parr Center for Ethics.

The Center’s blog features an enlightening post on Parr’s talk from Michael Moehler, visiting assistant professor of philosophy at UNC and a scholar of moral and political philosopohy. Moehler explains inductive reasoning and other philosophical dimensions of the economic debacle, which Parr discussed at length during his standing-room-only presentation.

Moehler:  “In his talk, Mr. Parr identified human nature as one of the key causes of the current financial crisis. The problem is not, however, egoistic behavior, as one might have thought. Instead, inductive reasoning is the main culprit. Inductive reasoning, based on the assumption that the future will be like the past, is essential for human beings to survive in this world, but it may also drive them into an existential or financial crisis. If everyone believes that prices will go up, as in our case housing prices, because housing prices always went up in the past, and the issued credit volume by lenders is not fully backed by real assets, then we may face a vicious problem of collective action when prices actually fall.

“The problem of collective action that arises in this case is, quite refreshingly, not that no action takes place, as in the Prisoner’s Dilemma game where everybody defects. Instead, the problem is that too much action takes place because everyone tries to sell, and the run on the banks effectively shuts them down. To illustrate this point, Mr. Parr used the metaphor of a ship in danger to capsize because too many people lean on one side of the boat. Coordinated action, then, if everyone runs from the one side of the boat to the other, will surely do the trick and sink the ship. How can we avoid such unwelcome collective disaster?”

For more click here.

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One Response to Getting philosophical about economic meltdown

  1. James Gray says:

    One question would be: Is this a good form of inductive reasoning, or a fallacious one? Over-generalization is a fallacy. In other words, did this crisis occur because people made the decision that would “probably cause a benefit” or did they overgeneralize?

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