Sunday, 1 May 2011

The Bankers' Ramp (2011)

From The Philosopher, Volume LXXXXIX No. 1 Spring 2011


THE BANKERS’ RAMP

Risk, social justice and elusive reforms
of Financial Markets

By Desmond Cohen



Inspecting the tatters of its financial services industry, following the banking crisis, the UK Labour government produced a White Paper, setting out its remedies. Yet here, there is but a single reference to 'moral hazard' and to issues of credit control. Such an omission is remarkable and seems to reflect a total misunderstanding of how to avoid a recurrence of events which have caused, and will continue to cause for years to come, enormous costs for the country as a whole. Is recent and current economic policy management instead simply a reflection of the needs of bankers - what Keynes in the 1930s called the bankers' ramp?

Indeed the primary conclusion of the great economist, John Maynard Keynes' General Theory was that economic systems are inherently unstable, in part because of irrational expectations which drive the system towards exuberance sometimes, and the opposite at other times. George Soros, one of the most astute participants in global finance, has argued strongly for effective regulation of financial markets precisely because of the inherent instability of economic systems.

But what we currently have, and seem likely to be left with, are financial institutions of enormous size which are functioning in a globalised market, and which continue to exhibit risk-taking behaviours that are destabilising both nationally and internationally. Many of them are simply Too Big To Fail - TBTF - and given their systemic importance cannot be allowed by policy makers to fail, causing enormous economic and social costs.

Since major financial institutions know that they are TBTF then they also know that, irrespective of their risk behaviours, Governments will bail them out. In these circumstances why should financial institutions behave differently in the future from the way they behaved in the past since they know they will be rescued irrespective of the financial and other costs to Governments?

That this is, of course, the problem of 'moral hazard', the Governor of the Bank of England well knows. But it is more or less dismissed in the present policy debate. It is a problem ducked by the British government since it does not want to take on powerful vested interests in the financial services industry (who incidentally are also major funders of all of the main political parties).

Remedies such as a separation of investment banking from retail banking with real competition between companies; effective regulation of private equity companies which have generated enormous costs in terms of asset stripping and the casualisation of employment in many sectors of the UK; effective international regulation of hedge –funds so as to minimise their destabilising impact on global asset and commodity markets - none of these are being put centre stage. The proposals on how to regulate the financial markets in the UK, written by those from the industry, offer a good deal of cosmetics but relentlessly pursues their interests to the neglect of the rest of the economy and society.

When times are good and everyone seems to be making money, no one cares too much about the details. It's only after the crash that the regulators and the ethicists come in.

Between 1999 and 2007 financial corporations in the UK increased their share of total corporate profits from 8.9% to 12.2% for reasons which must relate to increasing application of maths and scientific skills in the development of new financial products such as collateralised debt obligations (CDOs in the parlance), that is bundles of loans packaged together by a lender and then sold on, In such circumstances no one had an interest in ensuring that loans were made to those who could afford to repay, and once they were bundled no one could assess the underlying riskiness of the CDOs. A recipe for chaos in financial markets.

Indeed all that leverage and risk-taking, turned out all to be much more problematic than was initially assumed by the banks and others.

In a very insightful paper called 'All those Arrows', in the London Review of Books, back in the summer of 2009, Donald MacKenzie describes the analytical failures of those undertaking risk assessments of different categories of securities, and wrapping these up in CDOs, and argues that the approach is fundamentally flawed. MacKenzie concludes that:

In a situation of severe economic stress- falling house prices, rising unemployment-it wasn't just that some of these securities would perform badly, they all would....[ and] the crux of the problem has been not in CDOs per se but in the uncomfortable encounter between the world of CDOs and that of mortgage-backed securities… increasingly risky loans were made to private equity firms and to other highly indebted corporate borrowers because it was possible to package and sell on these loans...

And then, sure enough, came the payback. To get a better idea of the costs in monetary terms, adjusted for inflation, it is reported that United Kingdom Treasury estimates made in 2008, applying IMF methodologies, found that the output losses over the 4 years since the start of the banking crisis amounted to £280billion. This is probably an underestimate if anything.

When the decline in GDP, that is the total value of all goods and services in the economy, is added to the loss of potential growth that would otherwise have occurred then the impact of the reckless greed of bankers and others managing financial institutions becomes much clearer – and is vastly greater than is generally estimated.

Over the whole period 2008-2012 the effective loss of GDP looks as if it will be around 13-15%, and representing a dead-weight economic loss for every citizen in the UK. These costs are much larger than the purely financial costs of the support provided through the Treasury and the Bank of England to the banking sector.

Of course it is this decline in demand that accounts for the inexorable rise in unemployment since 2008. If the present recession is at all like the one in the early 1990s, and it seems likely to be both deeper and longer, then it will take many years for the level and rate of unemployment to return to their pre-recession levels (in the late 1990s it took 6 years). Since income from employment is by far the largest source of income for the economy as a whole then it is unsurprising that living standards overall will fall in the coming years.

It is estimated that about 1.5 million workers from Eastern Europe came to the UK after the opening of the borders in May 2004 and that by the end of 2009 some 50% of these had returned home. Many of those who remained continued to work in low paid and unskilled jobs. The outlook looks very bleak for labour, and especially for young workers entering the labour market in the coming years.

One of the factors that are likely to have strongly negative effects on employment is the unwinding of the excessive leverage of private equity companies. Between 2000 and 2006 there was a frenzy of lending, mainly by the pension funds, so that what economists call 'leveraged buyouts' in the UK racked up an incredible £1.9 trillion of property and securitisation debt. As a result private equity companies now own one-fifth of corporate Britain! Yet more than 60% of their outstanding loans will need to be repaid within the next 5 years (starting in 2012). Major companies face enormous financial liabilities with inadequate levels of assets to offset against their debts, and in the changed climate no easy way to raise new loans.

There are two other large-scale effects of the banking crisis neither of which received much if any attention. One of the consequences of the huge financial sector in the UK in a globalising world has been huge inflows of capital. The consumer boom and price inflation, especially in the house market and commercial properties, as well as the continued public sector fiscal deficits would not have been possible without this huge expansion of domestic credit. This credit expansion pushed up the value of sterling, and pushed down the UK's competitiveness particularly in manufacturing.

In this way too, the favouring of the Financial Services industries in the UK will have long term and negative implications for growth and employment.

Bank lending to the public sector - for things such as motorways or new hospitals - during the so-called boom years permitted a huge rise in public expenditure without the need to raise taxation. Such expenditure was treated by the Treasury as if it was off the books. This practise was not dissimilar in purpose to that of private companies, such as Enron, the giant US energy business that eventually collapsed under the weight of its debts. 

It is unsurprising therefore that the FSA, the supposed watchdog of the Financial Services industry in the UK, and the Bank of England were expected by the Government to 'have a light touch' in their regulation of the banks.


And so, given the fact that the government itself was compromised in being a beneficiary of the excesses of the past several years from the growth in domestic credit then what confidence can anyone have in any system of regulation where the government continues to have a decisive role? This is a matter I will come to below. For the moment it is enough to reflect that it is estimated that some £904 billion has already been spent by the UK Government on rescuing the banks – a sum so large, and with consequences so damaging, as to be beyond comprehension.

For economists, the telling figure is that the debt/GDP ratio is expected to double over the next five years to nearly 100% of GDP. There will inevitably have to be drastic cutbacks in public expenditure which will affect all areas of public expenditure. These cutbacks will have significant effects both on employment in the public sector, and on the level of services to the population.

Since the choices facing Government are so stark it is also unsurprising that they would obviously prefer a return to continued credit creation - an addiction that would enable relatively easy financing of the crisis. And so, again the element of self-interest will affect government proposals for the regulation of the financial services industry.

There does not exist, as far as I know, any detailed research on banking compensation in the UK for the medium and long term but such research has been undertaken for the financial sector in the USA. This has concluded, as one might have expected, that employees in the financial sector are overpaid. More specifically, as a 2009 research paper put it, that:

From the mid-1990s to 2006 the compensation of employees in the financial industry appeared to be too high.... Overall we conclude that bankers were paid about 40% too much.

One of the most unfortunate and costly impacts of the excessive rates of remuneration paid to many employees in financial services has been to destabilise the structure of pay and rewards in the UK. Thus even in the public sector there has been pay inflation for senior management on a totally unjustified scale, together with the introduction of a bonus culture that has no place in such areas of employment. How to restore traditional pay structures across the economy and how to rein back the ludicrous and unjustified levels of pay of many managers, directors etc is indeed one of the major problems that remains almost completely unaddressed.

Indeed these matters, of excessive pay and bonuses, have been left to the recommendations of a Committee chaired by a banker, Sir David Walker, who was himself a major beneficiary of this culture. That there remains a critical need to curb bonuses which have had the effect of inducing reckless lending is the populist remedy of all politicians. But it is also clear that unacceptably large payments are still being made to senior executives irrespective of the general situation and that the bonus culture is alive and well at this time.

The hope that bonuses can be restrained by more information about their payment and greater vigilance by Boards of Directors and shareholders is precisely that – a hope. Expecting so called 'risk sub committees' of the Boards of banks to restrain excessive risk taking is another institutional recommendation which seems unlikely to be successful. All of these proposals are simply tinkering with structures that need to be fundamentally changed. Until executives and board members of banks are required to internalise the costs incurred by the rest of the economy as a result of their excessive risk taking and greed then nothing much will ever change.

Not only have pay structures been distorted by the practices of the Financial Services industry and their generalisation to other sectors of the economy, but the levels of pay and other rewards have totally skewed the patterns of consumption everywhere. Inequality of income and wealth was dramatically increased during the past decade in the UK – more so than in any recent period in UK history. Again this reflected government policy – a relaxed view about the filthy rich and accompanying low rates of taxation on persons and on companies. A study by the Institute of Fiscal Studies concluded as follows:
Income inequality has risen [on most measures] in each of the past 3 years and is now at its highest level since our comparable time series began in 1961.....[between 1996/7 and 2007/8] income growth at the very top and very bottom of the distribution looks similar to the pattern under the Conservatives- with the lowest growth at the very bottom of the income distribution and the fastest growth at the very top. (Poverty and Inequality in the UK, 2009)
The result is a drawing-out of the reward structure in the UK with an accompanying increase in social anomie and alienation. The Gini coefficient, a measure of equality and social justice, was for the UK 0.25 when Margaret Thatcher came into office and it is now 0.36. In other words, the UK now sits alongside countries like Greece, Lithuania, Latvia and Portugal within the European Union, in terms of income inequality, with their uneducated underclasses and skeleton social provision, and far away from Europe's economic success stories, like Sweden (with a Gini of 0.23) and Germany (with 0.28). The rich in the UK became richer at a price paid in terms of social cohesion. Not least in the areas of private education and private health care which have expanded dramatically in recent years.

It is worth reporting one of the key conclusions of the National Equality Panel in 2010 which found that,
Inequalities in earnings and incomes are high in Britain, both compared with other industrial countries, and compared with thirty years ago......there remain deep-seated and systematic differences in economic outcomes between social groups across all of the dimensions we have examined including between men and women, between ethnic groups, between social class groups, between those living in disadvantaged and other areas, and between London and other parts of the country.
Missing from the policy dialogue apart from bemoaning excessive bonuses in the FS is any commitment to reducing inequality in the UK. It seems no longer to be an important policy objective – but it should be.

Of course, governments always face the risk of being captured by special interests. As mentioned already, writing in the 1920s and 1930s Keynes himself was very exercised by 'the bankers ramp' which he saw as undermining economic policy. But this is not a mere fanciful supposition of the Left. That most conservative of institutions the International Monetary Fund has concluded that,
Findings seem to be consistent with moral hazard interpretation whereby financial intermediaries lobby to obtain private benefits, making loans under less stringent terms....Under such interpretation, specialised rent- seeking and short-termism might justify reining in lobbying activities....our analysis suggests that the political influence of the financial industry can be a source of systemic risk [and] the prevention of future crises might require a weakening of the political influence of the financial industry... 
(A Fistful of Dollars: Lobbying and the Financial Crisis, IMF Working Paper December 2009.)
Certainly, looking at the UK government's proposals, it is evident that financial interests have again succeeded in manipulating policy to their own benefit and irrespective of the tremendous damage they have visited on every man, woman and child in the UK. Costs which will have to be met for many years into the future.

It is remarkable that, as I write this paper, the usual suspects: J.P. Morgan, Wells Fargo, Barclays, Goldman Sachs, HSBC, Credit Suisse, and so on, are all announcing huge profits and the setting aside of billions for the payment of bonuses. In part these profits reflect the demise of Lehman and Bear Stearns and the opportunity to move into markets that they were active in before they failed. But in large part the profits are due to booming bond markets due to the massive borrowing by Governments caused in large part by their rescue of the banking system.

It is truly a world where 'heads I win, tails you lose'. Indeed this is exactly the term used by Mario Cuomo in a July 2009 report called No Rhyme or Reason. The 'Heads I Win, Tails You Lose' Bank Bonus Culture. Cuomo is absolutely damming in its condemnation of US banking compensation practices and of the underlying so-called competitive processes that determine pay and rewards in all of the big US banks. The scale of the bonuses that were paid by lenders in the US in 2008 was huge: 9 banks that were all in receipt of government assistance paid bonuses of at least $1million each to 5,000 employees – a total of $32.6 billion. Six banks paid out more in bonuses than their total profits!

Mind you, the rebound in profits during 2009 has been truly amazing. While 'Main Street' has suffered the bonus pool at J P Morgan, Morgan Stanley and Goldman Sachs increased by 31% in 2009 over the previous year, and Wall Street banks as a group increased bonuses by 17% in 2009 to a staggering $20 billion (£13 billion). If the scale has been somewhat muted in UK, nonetheless personal bonuses of £95,000 (a politically astute whisker under six figures) seem to have been the norm at Barclays Capital. At RBS, a bank that is now publicly owned, in spite of losses of £3.6 billion in 2009 a bonus pot of £1.3billion has been awarded. It is worth noting that as the banks major shareholder, the UK government could have vetoed the RBS bonuses but chose not to do so.

The culture and excessive level of bonuses remains largely unaffected by the crisis. Indeed, it seems to have been coated with Teflon, and even the one year payroll surtax of 50% on bonuses in the UK in excess of £25,000 paid in 2009 has not dented it.(That this tax was not renewed by the Coalition Government is hardly suprising...)

It is worth quoting the conclusions of the Cuomo report again, since they have perfect resonance with the situation in the UK, where it is hoped by Government that a Code of Conduct will be enough to change the culture of excessive bonuses. If only pigs could fly! Urging moderation on banks is 'spitting into the wind' and just as useful.

One thing is clear from this investigation to date: there is no clear rhyme or reason to the way banks compensate and reward their employees.... Thus when the banks did well the employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by the taxpayers and their employees were still paid well. Bonuses and compensation did not vary significantly as profits diminished...[and] our investigation suggests a disconnect between compensation and bank performance....bank compensation structures lacked consistent principles and tended to result in a compensation system that was all 'upside'.

On the face of it perhaps the best way to restrain bonuses and shift pay systems to a rational and fair basis is through restraining the profits of the banks. Hence the need for both more effective regulation and much greater competition.

Since bonuses and other forms of compensation are at the core of risky behaviour then they should be subject to regulation by the authorities. But instead we are told that the bonus culture can be controlled and changed through the application of a 'Code of Conduct'. Indeed, it is evident from the most recent statement by the British government's regularly body that they are wholly unwilling to regulate pay and compensation while freely admitting that existing systems have contributed to excessive risk taking and thus the destabilisation of the economy.

Instead, it looks as if Government believes it can return to business-as-usual plus some marginal changes in the framework of regulation. It is evident that so far there have been no fundamental changes either in bank regulation or in the conduct of monetary policy in the UK despite the severity of the collapse of the economic and financial system. While the Government has set up a Banking Commission to advise it on reform it is evident from statements it has made that they have more or less ruled-out structural changes such as the separation of retail and investment banking. So we will be left with banks that are Too Big To Fail - with all the risks that this entails.

This strategy holds out the possibility, nay the probability, that next time the system will indeed collapse, with unknown but dire consequences for the people of the UK. In this respect it is worth quoting the Governor of the Bank of England who is clearly supportive of the need for structural reform of the financial sector and as such is at loggerheads with Government who continue to believe either that structural reform is not feasible or would be ineffective. Mervyn King could not have been more outspoken in rejecting the position of the Government:
It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place....The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion...The case for a serious review of how the banking industry is structured and regulated is strong.
He might as well have been spitting into the wind.



About the author: Professor Desmond Cohen is a former economic advisor to the United Kingdom Treasury and the World Bank

Address for correspondence:
Contact email: desmondcohen@cs.com


Review: The Hemlock Cup (2011)

From The Philosopher, Volume LXXXXIX No. 1 Spring 2011


Tao Meditation and a drink from the Hemlock Cup
 
Every so often, the publishing industry drops a blockbuster into the little pool of philosophical writing. Such was the case with The Hemlock Cup*, Book of the Week, on BBC Radio 4 in December 2010. The response was ecstatic
'Bettany Hughes has done it again; she brings to life not only Socrates himself but the whole of Periclean Athens. Here is a work of dazzling erudition which remains hugely readable - what more can one ask' John Julius Norwich  
'From the ancient Greek world's most beautiful woman to one of its self-acknowledged ugliest men is quite a step, but one that Hughes accomplishes without breaking strides or pausing for breath, Her enormous energy and enthusiasm are infectious. She writes up a storm. At the end of the road we may not be any closer to certainty or closure on the biggest issues of Socrates' inordinately rich life and afterlife but, as with the search for the historical Alexander or Jesus, travelling hopefully is quite possibly as good, and as much fun, as arriving. The journey is the reward. No one before Bettany Hughes, a highly accomplished communicator, has thought to weave Socrates' examined life into quite so rich and dense a tapestry of democratic Athens' teeming high-culture and mundane experience.  The good life is an elusive concept but, however defined, arguably no search for it would be dangerously impeded by buying this handsome volume and reading it through, critically, as Bettany Hughes' Socrates would have devoutly wished.' Professor Paul Cartledge, The Independent 

'Riveting, passionate and learned...The Hemlock Cup is a biography of Socrates, and also a lot more than that...As she unfolds the tale, she brings us an edited history of fifth-century BC Athens, too. This isn't padding, or even scene-setting (atmospheric though it always is). Without overstating the case, she shows how the city's life runs alongside the philosopher's, and then takes a different course... There's some terrific and passionate writing about a philosopher whose heroism is unquestionable (though that heroism resides in a constant questioning); and as lively and learned an introduction to classical Athens as you could want.' Tom Payne, Telegraph

Bettany Hughes' terrifically readable life of the philosopher, The Hemlock Cup, is more than just a life; it is also an evocation and an explanation of the world that created this extraordinary figure. The Hemlock Cup makes a vivid and persuasive case for the study of Socrates as a valuable means to understanding how our way of thinking about our own world came to be, and a guide to how we might understand it better.' Daniel Hahn, Independent on Sunday 

'The Hemlock Cup is another vibrant and atmospheric work from this well-known promoter of the ancient world'...this is an exciting book that puts the reader into the footsteps of Athenians of the 5th century BC'  Dr. Michael Scott, BBC History Magazine 

'After over thirty years of reading philosophical books and articles on Socrates (and even writing some of them!) it is very refreshing to see him approached from the perspective of his material and cultural environment. It anchors and illuminates the nature of his mission and achievements and really brings the period alive'  Professor Angie Hobbes, Philosopher, Senior Fellow in the Public Understanding of Philosophy 

'Hughes cleverly extracts the man from the dramatic scene-setting in the Platonic dialogues and puts him in his life and times by reconstructing ancient Athens and putting the same questions to us that he puts to adherents and fellow citizens. Hughes credits two editors for saving her from 'extreme colloquialism' but enough survives to give this intelligent, bright-eyed, vigorous book a life as vibrant as that lived by its subject.' The Times 

'Hughes conjures up the life in which Socrates worked and lived.'...This book will come as a revelation to most of my brothers and sisters in the philosophical community' Nightwaves, BBC Radio 3 
'An ambitious book, taking us through the 70 years of Socrates' life during one of the most exciting moments in world history...its scholarship is impeccable and Hughes' command of the sources daunting' Sp!ked Review of Books 

'Hughes's beguiling prose draws the reader into the devices and desires of the world's first democratic regime, and a Mediterranean world of sex, violence, sympotic carousing and great man-made beauty. She does full justice - as perhaps the Athenian People did not! - to the religious and philosophical endeavours of a unique career fatally shadowed by the ultimately disastrous Peloponnesian War (431-404 BCE). All that - and a beautifully produced book too'  Professor P Cartledge, Professor of Greek History, Cambridge University 
'Bettany Hughes breathes life into Socrates, the thinker Athens both revered and condemned. Socrates' has benefitted from Hughes' considerable skills...Hughes' expert attempts to make him flesh and blood, to fill in the gap, do him no harm. They teach us about the value of the real as well as the philosophical.' The Scotsman 

So it is that the life of her hero becomes a peg from which to hang a vivid depiction of Athens in its golden age, from the pinnacle of its greatness to the abyss of its ultimate defeat... Hughes's prose is the literary equivalent of CGI, re-creating for the reader a sense of the clamour and dazzle of the classical city that has rarely been bettered. Not only that, she is expert in knowing when to alter and vary her focus. Sometimes we are led by her through the streets of modern Athens, sometimes across an archaeological site, and sometimes down into the basement of a provincial museum, where rare treasures lie hidden. She spares no effort in bringing the world of Socrates alive. Describing Athens amid the death-agonies of the Peloponnesian war, Hughes comments that it "must have been reminiscent of Kabul 2002-10: ragged, war-torn, veiled women in the streets with no husbands, brothers or sons". Hers is an ancient Greece that is authentically cutting-edge.' Tom Holland, Observer 

She does a very good job of re-creating the material world in which Socrates lived, presenting ancient Athens as a much gaudier, dirtier, smellier and in some respects more industrial place than we often imagine. She is up to date on recent archaeological discoveries ...and she is full of vivid descriptions of what many of the famous landmarks look like to the modern visitor: run-down, and littered with fag ends and Coca-Cola cans. She can also be realistically unsentimental about the culture of classical Athens...she writes frankly of the nastiness of the world in which Socrates grew up and lived.' Mary Beard The Sunday Times 

'One can plunge enthusiastically into the seething world inhabited by Socrates that she recreates for us...This is the grand sweep of Athenian history during its most politically inventive and culturally exciting period...It all makes for a rich mixture; Socrates' early days as a keen natural scientist, his military career, his growing sense of what is important in life, his political scrapes, and his execution are played out in the company of Plato, Xenophon, Pericles, Alcibiades, Aristophanes, Aspasia, free men and slaves, shoemakers and sculptors, intellectuals and thugs ? a cast of millions ? against a backdrop of Athens with its markets, back streets, military engagements, theatrical performances, plague, triumph and disaster. Channel 4 must be licking its lips. It will make irresistible television' Peter Jones, Literary Review 

What then can mere philosophers add? Yet the publisher urges readers to contact them with feedback, saying 'Socrates would have insisted on it'. So we shall. Here is a thought-provoking review article by Peter Hubral.
 
The Hemlock Cup by Bettany Hughes: the first and second sentence inside the cover of the book read:
 
We think the way we do because Socrates thought the way we did! 
The unexamined life is not worth living .. is the founding principle of modern life.
 
Both statements are in complete disagreement with my own conclusions about Socrates and the ancient Greeks and other traditional cultures that disappeared from the globe (Why?). 
Ask yourself: How did Socrates examine his life? By confining himself to what I call Principle 1? 
Being (i.e. the world surrounding us) determines consciousness.
We think the way we do because Socrates thought the way we did!  or to what I call Principle 2? 
Consciousness (including the five senses) can be expanded to increasingly enhance what is. 
The unexamined life is not worth living .. is the founding principle of modern life.
 
My answer:
 
Socrates examined his life with Principle 2 and not Principle 1, which Hughes employs to interpret him. The Greeks called what results from employing Principle 1 to explain what is attained from Principle 2 mythos.
 
In other words Betty Hughes produces mythos, just like the Chassids and - I am afraid to say - all of us that rely on Principle 1.
 
Principle 1 is - as the reader may recognise - a statement made by Karl Marx. Nearly all the world confines itself to it: scientists, philosophers, politicians, etc. It provides the familiar knowledge, which is based on numerous hypotheses that all cannot be proven (e.g. division between the living and non-living, the belief that language is sufficient to understand the world, the belief that all events are causal and happen in space in time, mathematical axioms, etc.).
 There is no certain knowledge available from Principle 1.
 
Principle 2, on the other hand, can be verified by philosophical contemplation ? quintessentially Tao-Meditation. As I argue in my article on the links between Socrates and Eastern philosophy, Tao-Meditation provides unfamiliar knowledge not by assumptions (hypotheses) but by recollection. The Greeks (e.g. Socrates) and other traditional cultures employed it. What is attained from it results from the assumption that no assumption is to be made: Wuwei-principle. This provides universal eternal knowledge (gnosis).
 
Principle 2 provides ? which may appear strange to non-practitioners - as much knowledge as Principle 1, but of another kind. Principle 1 leads to what is erroneously called by those who do employ it objective knowledge and Principle 2 is called by them subjective knowledge.
 
As you observe, already the first two sentences of The Hemlock Cup tell me, what the rest of the book is all about: Assumptions, beliefs and fantasies about how beautiful and perfect we humans apparently are and that we all inherited this from the brilliant ancient Greeks. Who doesn't want to hear things like this to please his ego? Who doesn't want to be told that he is perfect and all the problems in the world are created by others (e.g. non-believers)?
 
Now imagine that I would attempt to feature Socrates in the way I indicate here to the masses? Would people consider me crazy, a doomsday prophet? The Chassids and many other religionists would consider me a heretic. Maybe you grasp now, why Socrates was forced to drink the hemlock cup.

The Philosopher's verdict: secular epiphany

The Hemlock Cup: Socrates, Athens and the Search for the Good Life
By Bettany Hughes, (Random House 2010) ISBN 0099554054

Plato's Cave revisited (2011)

From The Philosopher, Volume LXXXXIX No. 1


PLATO’S CAVE
and the Bicameral Brain
By Jim Danaher



Throughout most of our Western history, and especially our modern history, during which 'mathematics and everything akin to mathematics' has exercised an hypnotic appeal against which we have had the most difficulty resisting.

Modernity became obsessed with analysis and the elimination of vague, ambiguous, or contradictory ideas. We fell almost completely under its sway and came to imagine that the picture of reality that such thinking provided gave us the best way to understand our world and our place in it.

It was as if we had finally found our way out of the cave and into the kind of light that Plato had thought existed with the Platonic forms. It appeared that modern thinkers had found their way out of the shadowy and mysterious realm of our actual experience and found the kind of certainty that Plato had sought.

Today, however, we are able to see that from a very different perspective because of what we know concerning the human brain. We now know that as appealing as such certainty is, it merely represents one way that the human brain is capable of thinking. Instead of the moving picture of our actual experience, we are capable of ideas that represent snap shots, which make the distances, perspectives, and relations that we actually experience appear fixed and give us the kind of clear and distinct ideas that we crave.

Until recently, it was easy to fall under the sway of such analytic, abstract thinking and imagine it gave us the best way to truth and was therefore synonymous with reason itself. We now know, however, that such a mode of reason is merely one way we have of thinking about our world and ourselves. We now know that our desire for clear and distinct ideas, which began with Plato and culminated in the Cartesianism of Modernity, was merely one way we are able to think about the world, and although it gives us the kind of certainty that makes us feel divine, it does not give us a very realistic picture of our human experience.

* * * * *

In the seventh book of the Republic, Plato sets forth his famous allegory of the cave. The traditional understanding interpreted it as Plato arguing that both becoming and being were real because there were two different worlds or realms of reality. One was the world of sense-data, which the Pre-Socratic philosopher, Heraclitus argued was purely a matter of becoming. In this world, nothing ever exists in a pure state of being but is always becoming something else.

Plato however, claimed that there was another world where things did exist in a pure state of being. Parmenides and several other Pre-Socratic philosophers had long claimed that the world of which Heraclitus spoke was an illusory world produced by a naïve trust in our unreliable senses and that in fact reason showed us that only being truly existed and all becoming and change was illusory. Plato agreed with both Heraclitus and Parmenides: he believed that the world of our sense data was real and not merely illusory, but there was also a world of pure being - the parallel universe that Plato would come to describe as the world of the forms.

Since we have ideas of things that were eternal and unchanging, quintessentially geometirical andmathemematical concepts such as numbers or the idea of a circle as a figure with every point equal distance from the center, Plato believed that such entities must be more real than the temporal and mutable things we experience in the world of our senses.

Everything that we call a circle in the world of our senses is never the real circle or a figure whose every point is perfectly equal distance from the center. It is only a mutable replica of that eternal and immutable idea of a circle. Plato further imagined that if there were things as perfect as asuch eternal and immutable ideas of things like a circle, perhaps there were also eternal, immutable, and perfect ideas of courage, justice, love, or virtue - the instances of which appear in this world of our senses as mere shadowy replicas.

But what kind of thing is this parallel univese? Plato set us on a course to overcome the ambiguous and vague ideas that arise out of our experience and discover clear and distinct ideas by which we might organize our understanding. He further imagined that since such clear and distinct ideas were very different from those that arise out of our experience in this world of sense-data, there must be another world that houses these immutable and eternal ideas upon which we desire to found our understanding.

Although Plato spoke of another world that housed these eternal and immutable forms, and we equally have interpreted him in those terms for centuries, today we are open to a very different reading of Plato. That is because we now understand that what we naively attribute to the world outside of ourselves is often more a matter of how we think about the world than how the world actually is.

Since the time of Kant, philosophy has stressed that we bring much more to our experience of the world than we had previously thought. Furthermore, in the two centuries following Kant, we have come to discover that what we bring to our experience is much more than the innate mental hardware that Kant imagined.

We now accept that we interpret our experience through linguistic concepts that are culturally and historically relative. Perhaps creatures without language, culture, or history perceive their experience as given, but human beings certainly should not.

Once we realize how relative our understanding is to our own culture, history, and language community, we become much more philosophical. Reality is no longer simply data that we experience but an interpretation that is open to reinterpretation given different cultural and historical concepts. As we gain ever-greater insight into our human condition, those insights provide interpretations not available to previous generations. One such insight concerns what we have recently come to understand about the nature of our bicameral brains.

Since at least the time of the Greeks, we have known that the human brain is composed of both a left and right hemisphere. Today, our advanced technology has brought us to a much better understanding of the two hemispheres and the way they function. With functional magnetic resonance imaging, neuroscientists think that they are able to see how the different parts of the brain respond to different types of stimulus and thus involve different types of thinking. One thing that they say they have found is that although the two hemispheres certainly work together, they alternate in dominance with different types of thinking. In a book on The Physiology of Behavior, Neil Carlson says:
In general the left hemisphere participates in the analysis of information . . . In contrast, the right hemisphere is specialized for synthesis; it is particularly good at putting isolated elements together to perceive things as wholes.
The consensus today is that we are naturally equipped with two very distinct abilities in terms of how to think about our experience. We can analyze our experience and break it down into ever-smaller parts, or we can join the parts of our experience together into ever-greater wholes. Both modes of thought are within our power and both have a logic, which governs their reasoning. To prefer one mode of thought to the exclusion of the other is to limit our rational capacity and leave us ‘half-witted’. Sadly, much of the Western intellectual tradition has done just that, focusing on the ‘analytic’ and neglecting the ‘holistic’. We have come to associate reason itself with left-brain analysis.

What is so attractive about left-brain analysis is that it divides our objects of thought into ever-smaller parts that eliminate all contradictions and leave us with clear and distinct ideas. For example, take any paradoxical or contradictory phenomena and begin to analyze it into its parts and the contradiction eventually disappears. Life as a whole, maybe both joyful and sorrowful, but we can analyze it into sorrowful parts and joyful parts thus eliminating the paradoxes and contradictions and leaving us with clear and distinct ideas.

Both Plato and Aristotle certainly set us on that course, and in the interest of establishing such clear and distinct ideas, they introduced what we have come to know as the Laws of Thought. These laws of thought include the law of identity (A equals A), the law of non-contradiction (A does not equal not A), and the law of the excluded middle (either A or not A, but not both A and not A). Plato endorses the laws of non-contradiction and excluded middle in the Republic where he has Socrates say:
It is obvious that the same thing will never do or suffer opposites in the same respect in relation to the same thing and at the same time.
Likewise, in the Metaphysics, Aristotle says:
The same attribute cannot at the same time belong and not belong to the same subject and in the same respect. 
Both Plato and Aristotle understood that we naturally encountered contradictions but we could eliminate them by thinking analytically and dividing things up into ever-smaller parts until all the contradictions disappeared. Socrates is a contradiction in that he is both a father and not a father. We can eliminate that contradiction, however, by thinking about Socrates at one particular time or in relationship to one particular person. These are the qualifications that Plato and Aristotle ascribe above in order to analytically break things down into ever smaller parts and thereby eliminate contradictions and give us clear and distinct ideas.
In the modern era, Descartes took this a step further and convinced us that all clear and distinct ideas are true. This Cartesian thinking came to have such a hold on the modern mind that we eventually came to believe that only clear and distinct ideas were true. Consequently, analytic thinking came to be seen as synonymous with reason itself and ideas that were vague, ambiguous, or contradictory simply were not true.

Of course, there had always been an alternative, synthetic way of thinking that resisted the urge to analyze our experience into ever-smaller parts but instead leaves things whole and bears the contradictions and ambiguity that is so much apart of our actual experience. We can trace That tradition can be traced back to Heraclitus in the Greek world, and during the Christian period, the medieval mystics continued to practice such thinking in spite of the overwhelming influence of Plato and Aristotle. In the modern period, it found some expression with the Romantic Poets, but it was not until Hegel that it received a full philosophical explication and the status of logic.

Just as Plato and Aristotle had developed laws to govern analytic thinking, Hegel offered laws to govern synthetic thinking. With synthetic thinking, we deal with the whole rather than the parts, and when thinking about all the parts or respects together we certainly encounter contradictions, and the truth is often both/and, rather than either/or.

For Hegel, Plato and Aristotle’s laws of analytic thinking were artificial and made 'abstract identity its principle (Logic, 75).' When, according to traditional logic, we reason about whether Socrates was or was not a father, it is not Socrates we are reasoning about but one aspect of Socrates' life at one particular time. By abstracting one aspect of Socrates' life, at one particular time, toward one particular person, we create an abstract idea over which the traditional laws of thought rule. But when we think about things in their wholeness rather than as clear and distinct abstract ideas, however, 'everything is inherently contradictory', says Hegel in his Science, and the law of contradiction, rather than the law of non-contradiction is the guiding principle.

Hegel specifically attacked the law of identity, saying that, 'the law of identity says very little in itself'. The fact that A equals A is merely a tautology and has little meaning. It tells us almost nothing about the identity of a thing. The only way a thing truly takes on identity is through its otherness; that is, by including in its identity what it is not. Only a thing's otherness provides the boundaries that give it definition and meaning. Likewise Hegel also agreed with Heraclitus that since living things are always becoming, they must contain within themselves that which they are not.
It is one of the fundamental prejudices of logic as hitherto understood and of ordinary thinking, that contradiction is not so characteristically essential and immanent a determination as identity; . . . but contradiction is the root of all movement and vitality; it is only in so far as something has a contradiction within it that it moves, has an urge and activity. 
A little later, he says something that is even more shocking to those who strictly adhere to the traditional laws of thought and imagine them to be universal and the basis of reason itself.
Something moves, not because at one moment it is here and at another there, but because at one and the same moment it is here and not here, because in this 'here', it at once is and is not.

This is an obvious contradiction, and the laws of thought would say that something could not be here and not here at the same time, but that is only true if we think of time analytically whereby time moves from one fixed, analyzable point to another (for example, t1, t2, t3…), thus constituting a series of present moments. If that is the nature of time, then Hegel is certainly wrong, since something is here, for example, at the present moment (for example, t4) and not anywhere else. If, however, there are no fixed points on the continuum that is time, and time, like motion, cannot be arrested without it becoming something other than time, then Hegel is right and something is both ‘here’ and ‘not here’ at the same time. To think of time as an ongoing continuum forces us to think contrary to the laws of non-contradiction and excluded middle. Like motion or time, living things, in their livingness, also defy arrest.

Hegel also writes:
Abstract self-identity is not as yet a livingness.... 
Something is therefore alive only in so far as it contains contradictions within it. Yet, of course, we would not want to be without our ability to reason abstractly. Abstract analysis is certainly useful when constructing artifices like bridges and skyscrapers, or when we want to balance our checkbooks, but it is a grave mistake to believe that such thinking provides the best way to understand our human condition. The truth is that we are equipped with the ability to think analytically in order to get clear and distinct ideas, but we are also able to resist that temptation and bear the vagueness and ambiguity that so naturally comes with our human experience. 
The challenge is to resist the impulse to believe that one way of thinking is superior to the other. As Leo Straus says in What is Political Philosophy, human beings:
… are constantly attracted and deluded by two opposite charms: the charm of competence which is engendered by mathematics and everything akin to mathematics, and the charm of humble awe, which is engendered by meditation on the human soul and its experiences. Philosophy is characterized by a gentle, if firm, refusal to succumb to either charm.
What Plato expressed so long ago with his allegory of the cave was not, as he imagined, about another world, but rather about the way we desire to think about our human experience. Not only do we desire to know the forms so we might organize our understanding correctly, but we want them to be the kind of clear and distinct ideas we find in geometry.
In the modern period, Descartes convinced us that such a Platonic ambition was the way to solve all of our problems and consequently the modern mind came to associate the analytic thinking of the left-brain as synonymous with reason itself.

Consequently, no contradictory, ambiguous, or vague ideas could claim to be true. With such thinking, there were no mysteries, only puzzles that in time we would solve through a single mode of right thinking. Modern science told us that they had discovered a singular right way of thinking that if followed would eventually bring us to a complete understanding of the world and our place within it.
What we now understand much better than both Plato and Descartes is that we are hard-wired to reason in two very different and distinct ways: we can think analytically in order to get clear and distinct ideas and thereby eliminate all ambiguity and vagueness, or we can leave our experience whole and bear the paradoxes and contradictions that are so much a part of that actual experience. Plato might have imagined these as two different worlds but we now have the benefit of another way to interpret them - not as two universes that never interact but two distinct ways to think about the same world.

Furthermore, since the human brain provides us with two very distinct ways of interpreting our experience, there should not be a question of which is superior to the other. Both are part of our natural capacity and we should not have to choose one to the exclusion of the other. The trick is to have a whole mind that is capable of both modes of reason; that is, that we can think analytically, do mathematics, and create computers and bridges, but we can also think in ways that bear the contradictions, vagueness, and ambiguity that is so much a part of our actual experience.


Address for correspondence:
Professor Jim Danaher, <philos1011@gmail.com