The Constraints of a Disembedded Economy

Published on 7 November 2023 at 14:57

In the high-stakes game of global economics, one prevailing perspective, formalism, has long championed profit maximization as the ultimate goal of any economic system. This outlook envisions an economy divorced from moral and familial considerations, placing capital accumulation at the forefront. However, the 2008 economic crisis delivered a harsh wake-up call, revealing the stark limitations of this disembedded economic approach. As we delve into the consequences of profit-centric capitalism and the importance of regulatory oversight, it becomes evident that economics is far more complex than a mere game of monopoly.

The outlook of formalism views the economy as disengaged from critically relevant dimension of human life, such as morality and family. Overall, a disembedded economy is generally concerned with an emphasis of profit maximizing self-aggrandizement linked with capitalism. The 2008 economic crisis had a notable impact on the global economy, leading to thecollapse of many businesses. Formalism, a term popularized in our society, endures that the sole priority of profit maximization is universal to human behavior and essential in maintaining economic stability.

Capitalism is said to be self-regulating through competition, businesses are meant to govern based on the morals of their customers. However, capitalism is also the cause of the 2008 global economic crisis due the very nature of capitalist values: maximize profits. As mentioned in the video, the 2008 economic crisis started with the collapse of financial institutions such as Bear Stearns Companies and the reduction of stocks, implying that investors would make losses (Council of Foreign Affairs). Here we have revealed the limitations of formalism in a disembedded economy - people will do anything that prevents them from losing their money. This is why after stocks began to decline, most investors in numerous companies followed suit in withdrawing their investments to avoid taking losses (Council of Foreign Affairs). However, this behavior is entirely justified in a disembedded economy, the aim of which remains to maximize profits.

The constraints of a disembedded economy can be often leading to a crisis by allowing businesses to engage in an unregulated transaction. For instance, as the video establishes, prior to the crisis, there was huge borrowing with low payment interests. In a disembedded economy, there are no controls and thus there is no reserve for finance which makes them to collapse in times of crisis. Both Henry Paulson and Timothy Giethner present that the Federal Reserve Bank of the New York, a federal institution was the only hope to revive the US economy during the crisis (Council of Foreign Affairs). This concludes that the best way to prevent financial uncertainties recover from them is through strengthening government reserve banks and regulating economies in a manner that honors the magnitude of what’s at stake. 

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