Time to consider externalities and ethics

by Alice Alessandri e Alberto Aleo

We have been hearing about the crisis for so long that many of us just take it for granted. It has become a background noise to our lives and career choices, to the extent that the responsibility for effecting change in our everyday life has shifted away from us.

Yet, if we take a closer look at this phenomenon, we will realize that it is precisely our own behaviour and the way we think that should be the starting point for generating new options.

Why, exactly? Because there are externalities at work in the market that involve the attitudes and the actions of individuals! So, let’s try and figure out together what market externalities are.

The DNA of the Crisis

The collapse of the Lehman Brothers investment bank in September 2008 prompted the first ever truly international financial crisis and soon there were serious repercussions on the stock exchange. In just a few months the wave of disaster spread to the real economy, and the crisis moved into its third stage, the “industrial” stage (the first two phases were respectively the international financial crisis, then the effects hitting local stock exchanges) which knocked several points off the GDP in a very short time all over the world.

Despite the worsening situation, until the third stage, the markets still had theoretical and technical instruments available that could resolve the problem; in fact, we were still at the “economic” stage of the crisis.

However, the stall in decision-making, as well as partisan interests and bureaucracy in many countries hampered any effective response. The crisis therefore evolved further and a few years later it entered its fourth stage, the political one. This corresponded to the fall of many of the governments holding office and the beginning of period of instability that is still underway. The fourth stage, the political one, was not a necessary evolution of the phenomenon in all countries.

 The nations that avoided the implosion of their governmental structures, averted the risk of the crisis involving an evolution beyond economic outcomes, for which market based instruments would no longer suffice.

The Role of Externalities

The crisis was thus “outsourced”, spreading beyond the laws of economics and landing right within our democratic institutions, populated by people poorly prepared to recognize and manage it. Yet there was still another step, corresponding to the fifth stage of the phenomenon: the crisis became social, creating widespread collective manifestations of unease, such as violent protests and even attacks.

Many people have lost their trust in the institutions, in politics and in the capabilities of the world of industry and finance to reverse the recession. 

This is one of the reasons why such a high percentage of people not only have no work, but have even stopped looking for a job or have adopted a disheartened and critical attitude towards everything and everybody. The recession has thus turned into a deep crisis of confidence, the solution of which requires a change of perspective, a shift in viewpoint that must come about within each individual’s own mind.

Economics refers to the forces capable of influencing market dynamics, but which by their nature do not belong to it, and certainly do not respond to its laws, as externalities.

Politics, social dynamics and confidence are surely among these. A market subject to an excess of externalities “fails” technically, namely it is unable by itself to find a balance and activate the internal mechanisms that foster exchange and generate new wealth. Despite the fact that externalities can be a danger to the economy, the reluctance of certain phenomena to succumb to the laws of mathematics and their great diversity (too complex to be reduced to a standard norm), have led classical theory to shy away from analysing them.  Moreover, experts in market laws prefer to deal with utility functions and maximization of personal interest, rather than sociology and philosophy

Thus the concepts of ethics, reciprocity and once again trust, have remained outside most economic treaties, as if they were forces marginal to the markets.

A new economic theory

The tragedy of the historical period we are living through, and the profound changes it has triggered, have led us to discover that the elements we had termed externalities have a high impact power, which makes it impossible to apply most classical economic formulas. This is the period of “dominant externalities” and ethics must now play a central role in our business decisions as an instrument that can forge trust, strengthen relations and eradicate the recession from the bottom. For this reason, Passodue decided to focus on business ethics and sales ethics, as instruments that can restore prosperity to the economy and do more besides.

Each one of us can help to improve the conditions of the system; first, by realizing that the answers that will enable us to jump start our company cannot be found in economics textbooks alone, but in our heads, our behaviour and are relationship style: where words such as trust, ethics, motivation and hope still have a meaning.

| partem claram semper aspice |