So what I’m proposing is that finance, and indeed consumer Internet companies and all kinds of other people using giant computers, are trying to become Maxwell’s demons in an information network. The easiest way to understand it is to think about an insurance company. So an American health insurance company, before big computing came along, would hire actuaries to set rates. But the idea of, on a person-by-person basis, attempting to decide who should be in the plan so that you could only insure the people who need it the least on an individual basis, that wasn’t really viable. But with big computing and the ability to compute huge correlations with big data, it becomes irresistible. And so what you do is you start to say, "I’m going to..." — you’re like Maxwell’s demon with the little door — "I’m going to let the people who are cheap to insure through the door, and the people who are expensive to insure have to go the other way until I’ve created this perfect system that’s statistically guaranteed to be highly profitable.”
And so what’s wrong with that is that you can’t ever really get ahead. What you’re really doing then is you’re radiating waste heat. I mean, for yourself you’ve created this perfect little business, but you’ve radiated all the risk, basically, to the society at large. And if the society was infinitely large and could absorb it, it would work. There’s nothing intrinsically faulty about your scheme except for the assumption that the society can absorb the risk. And so what we’ve seen with big computing in finance is a repeated occurrence of people using a big computer to radiate risk away from themselves until the society can’t absorb it. And then there’s some giant bailout and some huge breakage. And so it happened with Long-Term Capital [Management] in the ’90s. It happened with Enron, and we saw a repeat of it in the events leading to the Great Recession in the late aughts. And we’ll just see it happening again and again until it’s recognized that this pattern is just not sustainable.
Indeed during the recent dotcom mania a bunch of quack business writers suggested that the company of the future would be totally virtual -- just a trendy couple sipping Chardonnay in their living room outsourcing everything. What these hyperventilating "visionaries" overlooked is that the market pays for value added. Two yuppies in a living room buying an e-commerce engine from company A and selling merchandise made by company B and warehoused and shipped by company C, with customer service from company D, isn't honestly adding much value.
The criminal underworld has figured out how to do what industrialists figured out 50 years ago: If you take just a little from a lot of people, you can get very rich, and those people won't fight back because the cost of retaliation is higher than the loss. As a result, people everywhere are being nickel and dimed to death.
The conclusion to be drawn from [the Bank of England’s executive director for Financial Stability Andy] Haldane's work is that an out-of-control financial sector is eating out the modern market economy from inside, just as the larva of the spider wasp eats out the host in which it has been laid.
Thomas Jefferson, the leading Enlightenment figure in the United States, along with Benjamin Franklin, who took exactly the same view, argued that dependence will lead to "subservience and venality", and will "suffocate[s] the germs of virtue". And remember, by dependence he meant wage labor, which was considered an abomination under classical liberal principles. There's a modern perversion of conservatism and libertarianism, which has changed the meanings of words, pretty much the way Orwell discussed. So nowadays, dependence refers to something else. When you listen to what's going in Congress, and people talk about dependence, what they mean by dependence is public support for hungry children, not wage labor. Dependence is support for hungry children and mothers who are caring for them.
We see this very dramatically right at this moment in Congress, under the leadership of Newt Gingrich, who quite demonstrably is the leading welfare freak in the country. He is the most avid advocate of welfare in the country, except he wants it to go to the rich. His own district in Cobb County Georgia gets more federal subsidies than any suburban county in the country, outside of the federal system itself... And it's supposed to continue, because this kind of welfare dependency is good. Dependent children, that's bad. But dependent executives, that's good. You gotta make sure they keep feeding at the public trough.
the nation is not an entity, it's divided into economic classes, and the architects of policy are those who have the economic power. In his days, he said, the merchants and manufacturers of England, who make sure that their interests are "most peculiarly attended to", like Gingrich. Whatever the effect on others, including the people of England. To Adam Smith, that was a truism. To James Madison, that was a truism. Nowadays, you're supposed to recoil in horror and call it vulgar Marxism or something, meaning that Adam Smith and James Madison must have been disciples of Marx. And if you believe the rest of the story, you might as well believe that. But those are facts which you can easily discover if you bothered reading the sacred texts, that you're supposed to worship, but not read.talk titled "Education and Democracy" at Michigan State University, March 28, 1995