Corporations in Contemporary Culture
"Greed...is good" - Wall Street (1987 screenplay)
One of this summer’s great box office disappointments was Deception, a romantic comedy/caper film. Why did it fail? It featured Julia Roberts, the top Hollywood actress for gross revenue for two decades. And it had a fail-safe plot line; it featured American corporations as venal, ego-driven enterprises whose desire to rip off their customers is topped only by their desire to ruin their competitors.
Time and again, the “dream factory” in Hollywood uses the modern corporation as the preferred villain at each opportunity. And it’s not just Hollywood. Our national health care debate is tagged by the left as a necessary battle with the drug and insurance industry, who will otherwise rob us blind and leave us dead for the sake of their next quarterly report. Unions have as their raison d’etre the need for a powerful force to counterbalance the corporate drive to exploit and discard their labor force. Consumer advocates, trial lawyers, and environmentalists all do their best to paint the corporation as the enemy, willing to stoop to any crime or despoliation to further their insatiable need for more profit. Tobacco and oil companies have traditionally been seen as most evil, but today investment banks and hedge funds are fighting hard to be awarded top honors in despicability in the public eye.
And yet, the model of the limited liability joint stock company has spread across the globe. It has come to dominate the economy of the former great Communist powers, Russia and China. It has revolutionized life in the Third World by bringing cell phone service to nearly every tribe and village. Corporations have been the leading force in globalization, pulling hundreds of millions of people out of poverty in India, China, and most of the Far East. It was the corporate model that moved postwar Germany and Japan from war-ravaged wrecks to industrial powerhouses. It was corporations that made possible the mass-production and distribution of life-saving medicines, green revolution seed varieties, the media revolutions caused by VCRs, CDs, DVDs, and MP3 players. The corporate model has made such an improvement in the lives of nearly every person on the planet. How can such a force for progress be so demonized by our culture?
Of course, man is more than just an economic animal. Most people rightly put family (and faith) above material prosperity. Money can’t buy happiness, as they say. But let’s judge people by what they do as well as by what they say. And any serious student of humanity will quickly see that the quest for material success is a strong driver of human behavior.
Is this because we live in a consumer society? Is our thirst for creature comforts because we are bombarded with advertising? Is materialism a new phenomena, a result of industrialization and mass media and culture?
My guess is that those things play a role, but are not the drivers. The story of King Midas long predates the arrival of broadcast television. Status is linked to prosperity in primitive tribes as much as it is in modern cities.
Material prosperity also allows some undoubted societal goods. A wealthy na-tion can afford better hospitals and schools. It can perform more scientific research, and support more theater and more art. Just as importantly, material prosperity is something many people value for its own sake and are willing to work hard for. In a free society, the pursuit of wealth should be allowed, just as the pursuit of birdwatching, novel writing, or any other activity that does no harm on its own.
Yet in some cultural circles (notably the more wealthy ones), something about material success is offensive. It has become seen as crass, lacking in virtue, and even in some sense immoral. Corporations, as organizations dedicated to creating value (for if they don’t, their customers desert them and they fail), are held in contempt and disgust. Corporate leaders are depicted as pigs, or crooks, or slavedrivers, or some combination thereof.
The truth is that wealth provides freedom and security. Having your own re-sources makes you less dependent on government or charity. It gives you the luxury of seeking your own answers to the questions of life. Wealth is not, and should never be, a license to ignore or harm others. When wealth subverts law and permits abuse, then it does become a menace. But that is not an intrinsic feature of wealth. Instead, it is a feature of a society with poor governance and without the rule of law.
Corporations have proven to be the best way for society to create (and distribute) wealth, prosperity, and individual independence and freedom. Corporations must live by the rules, of course. But as long as they do, they should be celebrated, not demonized.
Monday, October 19, 2009
Friday, September 25, 2009
Rules and Regulators
"That government is best which governs least" - Henry David Thoreau
There are some who believe that true free markets need no assist from rules, regulators, or governments at all. Certainly, eBay has proven to be a big success with very little help from the formal organs of government. But eBay itself acts as a formidable regulator, removing members who misbehave, and eBay has incorporated strong feedback mechanisms to allow members to police each other through eBay's ratings system.
For nearly all other markets, the state plays an important role in making the market work. It prevents domination by coercion. It enforces contracts, and persecutes fraud. And in most cases, it also regulates markets in an effort to promote fairness and trust, and frequently to advance public policy aims. A huge amount of our legal code is devoted to laying down the law on how business can do business. Employment law, the Uniform Commercial Code, the bulk of environmental regulation, and an alphabet soup of Commissions (ICC, SEC, FCC, CTFC, FDIC, etc.) are devoted to telling commercial enterprises how they can go to market.
Government policy is usually drafted by legislators with good intentions and no practical experience. As we all know, the road to hell is paved with good intentions. Commercial legislation results in all kinds of unintended consequences. "Cash for Clunkers" resulted in panicked shopping, model shortages of popular replacement cars, a sudden loss of inventory in the used car market (raising prices for those shoppers), and perhaps little actual stimulus as many buyers merely moved planned purchases up, rather than injecting new money into the car sales market.
One of the most common consequences of regulating markets is a perverse phenomenom known as "regulatory capture". The industry under regulation has a far greater interest in the details of the rules than others, and does all it can to influence the result. Industry representatives rightly point out that they have far greater expertise than the lawmakers or bureaucrats, and industry uses its greater knowledge to argue for change. Pressure is exerted to get people with industry experience on the commission. Such people are likely to have contacts in the regulated industry, and have some sympathy for their concerns. Gradually, the commission evolves to mirror the industry it regulates, rather than policing it.
Does this mean the regulators, now "captured", give industry free reign? Actually, no. Industry almost always fights new rules. But once they lose the fight, they frequently find the rules give them a useful advantage. Rules take time to master, and a rule-bound industry is more difficult for new entrants to penetrate. It's been said that there are only six men in all of New York City who have the knowledge and connections to get a building permit out of the city's bureaucracy. One of those six men is Donald Trump, and it is this skill of his (not his business acumen nor his eye for a good opportunity) that made him a multi-millionare. In fact, when The Donald invests outside of NYC, his investments usually go south.
The markets that work best are those that have a large number of participants. Here is another secret to the success of eBay. It may have the largest pool of buyers and sellers in the world. Barriers to entry give unwonted market power to those who manage to scale them, raising the costs for everyone else.
This is a message that our legislators and bureaucrats rarely hear and almost never figure out on their own. As a result, regulation quickly becomes over-regulation, and those players who master the rules turn their market advantage into extra profits for themselves and extra costs for everyone else. Regulatory capture is a parasite, and one that seems to be growing.
There are some who believe that true free markets need no assist from rules, regulators, or governments at all. Certainly, eBay has proven to be a big success with very little help from the formal organs of government. But eBay itself acts as a formidable regulator, removing members who misbehave, and eBay has incorporated strong feedback mechanisms to allow members to police each other through eBay's ratings system.
For nearly all other markets, the state plays an important role in making the market work. It prevents domination by coercion. It enforces contracts, and persecutes fraud. And in most cases, it also regulates markets in an effort to promote fairness and trust, and frequently to advance public policy aims. A huge amount of our legal code is devoted to laying down the law on how business can do business. Employment law, the Uniform Commercial Code, the bulk of environmental regulation, and an alphabet soup of Commissions (ICC, SEC, FCC, CTFC, FDIC, etc.) are devoted to telling commercial enterprises how they can go to market.
Government policy is usually drafted by legislators with good intentions and no practical experience. As we all know, the road to hell is paved with good intentions. Commercial legislation results in all kinds of unintended consequences. "Cash for Clunkers" resulted in panicked shopping, model shortages of popular replacement cars, a sudden loss of inventory in the used car market (raising prices for those shoppers), and perhaps little actual stimulus as many buyers merely moved planned purchases up, rather than injecting new money into the car sales market.
One of the most common consequences of regulating markets is a perverse phenomenom known as "regulatory capture". The industry under regulation has a far greater interest in the details of the rules than others, and does all it can to influence the result. Industry representatives rightly point out that they have far greater expertise than the lawmakers or bureaucrats, and industry uses its greater knowledge to argue for change. Pressure is exerted to get people with industry experience on the commission. Such people are likely to have contacts in the regulated industry, and have some sympathy for their concerns. Gradually, the commission evolves to mirror the industry it regulates, rather than policing it.
Does this mean the regulators, now "captured", give industry free reign? Actually, no. Industry almost always fights new rules. But once they lose the fight, they frequently find the rules give them a useful advantage. Rules take time to master, and a rule-bound industry is more difficult for new entrants to penetrate. It's been said that there are only six men in all of New York City who have the knowledge and connections to get a building permit out of the city's bureaucracy. One of those six men is Donald Trump, and it is this skill of his (not his business acumen nor his eye for a good opportunity) that made him a multi-millionare. In fact, when The Donald invests outside of NYC, his investments usually go south.
The markets that work best are those that have a large number of participants. Here is another secret to the success of eBay. It may have the largest pool of buyers and sellers in the world. Barriers to entry give unwonted market power to those who manage to scale them, raising the costs for everyone else.
This is a message that our legislators and bureaucrats rarely hear and almost never figure out on their own. As a result, regulation quickly becomes over-regulation, and those players who master the rules turn their market advantage into extra profits for themselves and extra costs for everyone else. Regulatory capture is a parasite, and one that seems to be growing.
Tuesday, September 15, 2009
The Business of Banking
Borrow at 3% interest, lend at 6% interest, and be on the golf course by 3pm - Anonymous
The latest recession has been described as more serious than previous recessions because it's a financial recession. It's caused by and centered on the financial sector of our economy, and thus more serious than previous recessions based on oil embargoes or dot com bubbles. But what exactly is "the financial sector"? What role does it play in our economy?
Financial institutions (primarily banks, but also other entities such as brokerages and insurance companies) differ from other enterprises because they are in the money business. Mostly, they are in the business of "other people's money". They receive deposits, premiums, investment capital or some such from those who have a current surplus of cash. These people (or creditors) could be retirees with a saved nest egg. They could be a pension fund receiving contributions but not yet needing to pay the pensions. They could be mutual funds making investments. Most of them have a future need for the cash, but they don't have an immediate need. So they deposit their money in a financial institution, either as savings or as investment.
The receiving institution doesn't usually keep the money. Instead, they find a party with a need (or opportunity) that requires cash today. This could be a corporation wanting to build a new factory, a producer wishing to shoot a new film, or you wanting to buy a house or car, but not having the purchase price in cash. It could be your government running a deficit. These people (or debtors) borrow the money with a promise to repay, with interest.
So finance companies match investment capital with investment opportunities. As such, they are vital to nearly every other sector of the economy, particularly consumers and government, who represent the majority of outstanding debt.
Being important, and close to the money, means that financing is usually quite profitable. And so it has proven in the past 20 years, with the financial sector growing from 5% of our economy to 15%, and representing some 40% of corporate profits in 2006.
So what happened in 2007 and 2008? Well, one important aspect of finance is risk. Not all debtors pay you back. The riskier the debtor, the more interest you need to charge to cover that risk. If you don't charge enough, and too many default, you lose money. And worse, it's not your money. It's other people's money, those creditors who deposited or invested their surplus capital with you. Just because your debtor left you high and dry doesn't mean you don't owe back the money to your depositors. If you misprice risk, suddenly you becaume a defaulting debtor yourself.
During the frenzy of globalization in the last 10 years, China and other export-oriented economies ran a trade surplus. They sold more than they bought overseas, and found themselves with a mountain of cash. Much of the cash was returned to America as investment capital. But there were only so many good investment opportunities. The rate of return on many investments fell.
One sector, thinking itself clever, saw a chance to channel some of this cash their way. By 2005, residential real estate was seeing a strong boom start to tail off. Homes were getting too expensive for ordinary people to qualify for ordinary mortages. Real estate brokers "solved" this problem with a host of new types of mortgage. Sub-prime loans, teaser rates, liar loans and so on made otherwise disqualified buyers suddenly eligible. Admittedly, these buyers were riskier than the traditional type, but that was handled by charging these people higher rates. Besides, even if the buyer defaulted, the mortgage was secured by the home. Home prices in the USA hadn't fallen on a national scale since the Great Depression. So what risk was there? But, just in case, these loans were bundled with ordinary ones and sold in packages. The idea was that the typical loans would compensate for the risky ones. Since these bundles included high interest mortgages, their rate of return was higher than average, and everyone wanted some.These bundled loans were then sold by the billions to nearly every major financial institution in the world.
Then the real estate market, artificially inflated by this cash infusion, rose to unsustainable levels. It turned out that many of the new buyers couldn't afford their mortgages, especially after the teaser rates ended. Some mortgage payments doubled, and the overstretched buyers walked away. Forclosures began, and the market fell.
Now the logic of bundling took on a vicious reversal. Rather than the typical loans compensating for the risky ones, the risky ones poisoned the typical loans. The bundles became "toxic". No one wanted them on their balance sheets, but no one would buy them. Markets panicked, investors withdrew their money, and banks collapsed.
Banking by its very nature is unstable. Banks borrow money for six months, and loan it out for 30 years. The added stress of toxic assets undermined many of the most famous names in American capitalism. We understand the fall. But have we discovered how to rise again, and learned the lesson to prevent another collapse?
The latest recession has been described as more serious than previous recessions because it's a financial recession. It's caused by and centered on the financial sector of our economy, and thus more serious than previous recessions based on oil embargoes or dot com bubbles. But what exactly is "the financial sector"? What role does it play in our economy?
Financial institutions (primarily banks, but also other entities such as brokerages and insurance companies) differ from other enterprises because they are in the money business. Mostly, they are in the business of "other people's money". They receive deposits, premiums, investment capital or some such from those who have a current surplus of cash. These people (or creditors) could be retirees with a saved nest egg. They could be a pension fund receiving contributions but not yet needing to pay the pensions. They could be mutual funds making investments. Most of them have a future need for the cash, but they don't have an immediate need. So they deposit their money in a financial institution, either as savings or as investment.
The receiving institution doesn't usually keep the money. Instead, they find a party with a need (or opportunity) that requires cash today. This could be a corporation wanting to build a new factory, a producer wishing to shoot a new film, or you wanting to buy a house or car, but not having the purchase price in cash. It could be your government running a deficit. These people (or debtors) borrow the money with a promise to repay, with interest.
So finance companies match investment capital with investment opportunities. As such, they are vital to nearly every other sector of the economy, particularly consumers and government, who represent the majority of outstanding debt.
Being important, and close to the money, means that financing is usually quite profitable. And so it has proven in the past 20 years, with the financial sector growing from 5% of our economy to 15%, and representing some 40% of corporate profits in 2006.
So what happened in 2007 and 2008? Well, one important aspect of finance is risk. Not all debtors pay you back. The riskier the debtor, the more interest you need to charge to cover that risk. If you don't charge enough, and too many default, you lose money. And worse, it's not your money. It's other people's money, those creditors who deposited or invested their surplus capital with you. Just because your debtor left you high and dry doesn't mean you don't owe back the money to your depositors. If you misprice risk, suddenly you becaume a defaulting debtor yourself.
During the frenzy of globalization in the last 10 years, China and other export-oriented economies ran a trade surplus. They sold more than they bought overseas, and found themselves with a mountain of cash. Much of the cash was returned to America as investment capital. But there were only so many good investment opportunities. The rate of return on many investments fell.
One sector, thinking itself clever, saw a chance to channel some of this cash their way. By 2005, residential real estate was seeing a strong boom start to tail off. Homes were getting too expensive for ordinary people to qualify for ordinary mortages. Real estate brokers "solved" this problem with a host of new types of mortgage. Sub-prime loans, teaser rates, liar loans and so on made otherwise disqualified buyers suddenly eligible. Admittedly, these buyers were riskier than the traditional type, but that was handled by charging these people higher rates. Besides, even if the buyer defaulted, the mortgage was secured by the home. Home prices in the USA hadn't fallen on a national scale since the Great Depression. So what risk was there? But, just in case, these loans were bundled with ordinary ones and sold in packages. The idea was that the typical loans would compensate for the risky ones. Since these bundles included high interest mortgages, their rate of return was higher than average, and everyone wanted some.These bundled loans were then sold by the billions to nearly every major financial institution in the world.
Then the real estate market, artificially inflated by this cash infusion, rose to unsustainable levels. It turned out that many of the new buyers couldn't afford their mortgages, especially after the teaser rates ended. Some mortgage payments doubled, and the overstretched buyers walked away. Forclosures began, and the market fell.
Now the logic of bundling took on a vicious reversal. Rather than the typical loans compensating for the risky ones, the risky ones poisoned the typical loans. The bundles became "toxic". No one wanted them on their balance sheets, but no one would buy them. Markets panicked, investors withdrew their money, and banks collapsed.
Banking by its very nature is unstable. Banks borrow money for six months, and loan it out for 30 years. The added stress of toxic assets undermined many of the most famous names in American capitalism. We understand the fall. But have we discovered how to rise again, and learned the lesson to prevent another collapse?
Thursday, September 3, 2009
The Purpose of Profits
Property is theft! -Pierre-Joseph Proudhon
Great wealth has always sparked deep resentment among some of those who lack it. For a few it's envy; they don't see wealth as immoral, they just wish they were the ones who possessed. For others it's fear; history is full of examples of the very wealthy using their money for unfair advantage or illegitimate power.
This kind of resentment is petty and harmless. But there is another kind of anger over wealth, particularly wealth earned via investments and profits. There are many who find the whole pursuit of profit to be fundamentally immoral and beyond salvation. Money is the root of all evil. Man's higher calling lies elsewhere. There is greater merit to the "service" professions; teaching, nursing, social work, etc. Private business is inherently selfish, if not positively evil. Corporations epitomize how the pursuit of profit ruins your soul.
At this point, I'd like to ask "What ARE profits?". Fundamentally, profits aren't just money. They are two things; information and rewards.
To make a profit, you must do many things. You must find a demand or a market that can be served better than it is today. You must invest in developing some process that meets the demand. You must wait, living less well than you otherwise could, while the process is developed and your wealth is tied up. And you must endure the anxiety that your scheme will fail, your time will be wasted and your investment money will be gone forever.
Many investments come to nothing. Thomas Edison famously tried 10,000 different filaments before he discovered that tungsten made a successful light bulb. Risk averse investors don't try invention; instead they buy government debt, or put their money in mutual funds, or buy securities on the stock exchange. These people don't usually lose their investments, but they also don't get the spectacular return that Edison, or Bill Gates, or Sam Walton received when they took those big risks.
Today, the cost of developing a new jetliner or cancer drug runs to the tens of billions. Who should provide that money? The fall of the Soviet Union was, in large part, the result of the fact that massive government investment can't match the flexibility, innovation and entrepreneurial spirit of millions of retail investors.
Profits tell us whose innovation was a success. With this information, future investment is given a guide or direction. And the rewards for successful investment give the incentive to future investors to also risk their savings on innovation. If there is no chance of reward, what incentive is there to invest?
So why do some people scorn profits and corporations (which are, ultimately, vehicles to allow multiple people to invest in a common enterprise)? Why the resentment?
First, let's take a look at which people evince such a resentment to profits and corporations. Usually, the angry crowd isn't made up of poor people. Most poor see the rich as a role model, not an adversary. Many poor desperately save so they can own their own business, or perhaps put their hopes in their children by working extra hours so their children can remain in school and begin the path to a better life. No, the angry crowd usually includes fairly well-educated people. Ministers, teachers, professors, government clerks, lawyers, journalists, professional politicians and the like. These people see themselves equal to the wealthy in terms of talent and schooling. They feel they should also be equal in material prosperity. They followed the rules, got their degrees or diplomas, but they can't afford the European sedans or European vacations that their investment banker classmates buy so freely. They feel cheated. What did they do wrong?
Mostly, they didn't take risks. They didn't sacrifice to build up enough savings to have their own working capital to start a business, or they didn't invest "sweat equity" in their garage or dorm room tinkering to invent the next Apple or Google. Or they didn't accept a career that involved years of stressful graduate school (medicine) or high-pressure, 14 hour days (investment banking). I don't blame them. I want to enjoy life, and my passion isn't in invention or analyzing spreadsheets to midnight. But there are those who do make those sacrifices. Let us recognize them, and allow them their reward.
And let's face it. We all benefit, too. The inspiration and hard work of the innovative and entrepreneurial classes is what makes our nation the most dynamic economy on the planet. China's mandarin class never gave them any edge in commerce or science. It's the combination of excellent education with the "animal spirits" of drive and ambition that have made our nation such an economic powerhouse. We forget that at our peril.
Great wealth has always sparked deep resentment among some of those who lack it. For a few it's envy; they don't see wealth as immoral, they just wish they were the ones who possessed. For others it's fear; history is full of examples of the very wealthy using their money for unfair advantage or illegitimate power.
This kind of resentment is petty and harmless. But there is another kind of anger over wealth, particularly wealth earned via investments and profits. There are many who find the whole pursuit of profit to be fundamentally immoral and beyond salvation. Money is the root of all evil. Man's higher calling lies elsewhere. There is greater merit to the "service" professions; teaching, nursing, social work, etc. Private business is inherently selfish, if not positively evil. Corporations epitomize how the pursuit of profit ruins your soul.
At this point, I'd like to ask "What ARE profits?". Fundamentally, profits aren't just money. They are two things; information and rewards.
To make a profit, you must do many things. You must find a demand or a market that can be served better than it is today. You must invest in developing some process that meets the demand. You must wait, living less well than you otherwise could, while the process is developed and your wealth is tied up. And you must endure the anxiety that your scheme will fail, your time will be wasted and your investment money will be gone forever.
Many investments come to nothing. Thomas Edison famously tried 10,000 different filaments before he discovered that tungsten made a successful light bulb. Risk averse investors don't try invention; instead they buy government debt, or put their money in mutual funds, or buy securities on the stock exchange. These people don't usually lose their investments, but they also don't get the spectacular return that Edison, or Bill Gates, or Sam Walton received when they took those big risks.
Today, the cost of developing a new jetliner or cancer drug runs to the tens of billions. Who should provide that money? The fall of the Soviet Union was, in large part, the result of the fact that massive government investment can't match the flexibility, innovation and entrepreneurial spirit of millions of retail investors.
Profits tell us whose innovation was a success. With this information, future investment is given a guide or direction. And the rewards for successful investment give the incentive to future investors to also risk their savings on innovation. If there is no chance of reward, what incentive is there to invest?
So why do some people scorn profits and corporations (which are, ultimately, vehicles to allow multiple people to invest in a common enterprise)? Why the resentment?
First, let's take a look at which people evince such a resentment to profits and corporations. Usually, the angry crowd isn't made up of poor people. Most poor see the rich as a role model, not an adversary. Many poor desperately save so they can own their own business, or perhaps put their hopes in their children by working extra hours so their children can remain in school and begin the path to a better life. No, the angry crowd usually includes fairly well-educated people. Ministers, teachers, professors, government clerks, lawyers, journalists, professional politicians and the like. These people see themselves equal to the wealthy in terms of talent and schooling. They feel they should also be equal in material prosperity. They followed the rules, got their degrees or diplomas, but they can't afford the European sedans or European vacations that their investment banker classmates buy so freely. They feel cheated. What did they do wrong?
Mostly, they didn't take risks. They didn't sacrifice to build up enough savings to have their own working capital to start a business, or they didn't invest "sweat equity" in their garage or dorm room tinkering to invent the next Apple or Google. Or they didn't accept a career that involved years of stressful graduate school (medicine) or high-pressure, 14 hour days (investment banking). I don't blame them. I want to enjoy life, and my passion isn't in invention or analyzing spreadsheets to midnight. But there are those who do make those sacrifices. Let us recognize them, and allow them their reward.
And let's face it. We all benefit, too. The inspiration and hard work of the innovative and entrepreneurial classes is what makes our nation the most dynamic economy on the planet. China's mandarin class never gave them any edge in commerce or science. It's the combination of excellent education with the "animal spirits" of drive and ambition that have made our nation such an economic powerhouse. We forget that at our peril.
Thursday, August 27, 2009
Ethics and Economics
"The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of misery." - Winston Churchill
What should the proper goal of an economic system be? Should it be prosperity or social justice? The easy answer, of course, is "both", and any policies that simultaneously promote growth and help the impoverished are going to be popular.
But many times we are faced with a decision to advance either one or the other; greater wealth or greater equality of wealth. The two goals can't be pursued in tandem; policymakers must choose which goal is of greater importance. This is complicated by the fact that advancing one goal may not just ignore the other; it can actually cause the other to lose ground. Higher taxes make more job training available, but hurt the balance sheets of companies who might otherwise want to hire the newly trained workers. On the other hand, reduced tax rates offered to select industries to promote job growth can spark a bidding war between jurisdictions, cutting tax revenues for each one without actually generating any new jobs.
So it's usually a trade-off. How do we decide what to trade off, and what to keep? Many free-market enthusiasts will plump for prosperity. The role of the state at most is to work for equality of opportunity; then the market will reward best those willing to work more, or with greater skill or intelligence, or with greater judgment on when to save or when to invest. Let those who earn success keep the rewards of success. Those who don't succeed either judged badly or didn't try hard enough in the first place, and deserve no special consideration.
That's a pretty extreme position, and even most free market fans will temper that with a little mercy. No one can guarantee equality of opportunity. Those whose parents push for education will tend to be more skilled than those whose parents act otherwise. Some people invest wisely, but still come short due to sheer bad luck. In fact, many of the most successful American capitalists of the past (Jay Rockefeller, Andrew Carnegie, Henry Ford), who cut their teeth in ruthless markets, were also dedicated philanthropists whose foundations and social work pay dividends even today. This tradition continues, as many of today's successful businessmen are active in community service groups such as Rotary, Kiwanis, and thousands of local charities and churches. Many who appear to be tough-as-nails on the job are deeply involved (personally and financially) in non-profit organizations to help the less fortunate.
I think the feeling of sympathy and compassion for others is a common thread in most of humanity, regardless of political or economic views. Where the true division lies is who should shoulder the burden of aid. Free-market types put their faith in private philanthropy, while believers in social justice see this as the proper role of the state.
There is sometimes a deeper motive for using the state in the role of benefactor. It's not just a matter of helping the poor. It's a feeling that what is really needed is punishment of the rich. There's a sense among many people that being wealthy is a moral failing. "Behind every great fortune is a great crime, to misquote Balzac. Envy is human, but for some this goes beyond mere jealousy. This is class warfare (if you're not rich, as Karl Marx was not) or self-loathing (if you are rich, as Max Engels was). The need to soak the rich with punitive taxation, undermine private enterprise with burdensome and damaging over-regulation, and replace local charities with bureaucratic public programs frequently stems from a visceral desire to humble those who are at the top of the ladder of success.
This is not economics. This is not ethics, either. On a small scale, it's petty. When it becomes a philosophy of governance, it's poisonous. To make success at commerce a cause for wrath is to make prosperity impossible to achieve, at least legally. Ambitious people leave the private sector and enter the public sphere, turning their energies (and their egos) into building power bases rather than building thriving commercial enterprises.
A grasping government, it turns out, doesn't do much to pursue social justice anyway. Better to leave the creation of prosperity, and the pursuit of social justice, to the private sector.
What should the proper goal of an economic system be? Should it be prosperity or social justice? The easy answer, of course, is "both", and any policies that simultaneously promote growth and help the impoverished are going to be popular.
But many times we are faced with a decision to advance either one or the other; greater wealth or greater equality of wealth. The two goals can't be pursued in tandem; policymakers must choose which goal is of greater importance. This is complicated by the fact that advancing one goal may not just ignore the other; it can actually cause the other to lose ground. Higher taxes make more job training available, but hurt the balance sheets of companies who might otherwise want to hire the newly trained workers. On the other hand, reduced tax rates offered to select industries to promote job growth can spark a bidding war between jurisdictions, cutting tax revenues for each one without actually generating any new jobs.
So it's usually a trade-off. How do we decide what to trade off, and what to keep? Many free-market enthusiasts will plump for prosperity. The role of the state at most is to work for equality of opportunity; then the market will reward best those willing to work more, or with greater skill or intelligence, or with greater judgment on when to save or when to invest. Let those who earn success keep the rewards of success. Those who don't succeed either judged badly or didn't try hard enough in the first place, and deserve no special consideration.
That's a pretty extreme position, and even most free market fans will temper that with a little mercy. No one can guarantee equality of opportunity. Those whose parents push for education will tend to be more skilled than those whose parents act otherwise. Some people invest wisely, but still come short due to sheer bad luck. In fact, many of the most successful American capitalists of the past (Jay Rockefeller, Andrew Carnegie, Henry Ford), who cut their teeth in ruthless markets, were also dedicated philanthropists whose foundations and social work pay dividends even today. This tradition continues, as many of today's successful businessmen are active in community service groups such as Rotary, Kiwanis, and thousands of local charities and churches. Many who appear to be tough-as-nails on the job are deeply involved (personally and financially) in non-profit organizations to help the less fortunate.
I think the feeling of sympathy and compassion for others is a common thread in most of humanity, regardless of political or economic views. Where the true division lies is who should shoulder the burden of aid. Free-market types put their faith in private philanthropy, while believers in social justice see this as the proper role of the state.
There is sometimes a deeper motive for using the state in the role of benefactor. It's not just a matter of helping the poor. It's a feeling that what is really needed is punishment of the rich. There's a sense among many people that being wealthy is a moral failing. "Behind every great fortune is a great crime, to misquote Balzac. Envy is human, but for some this goes beyond mere jealousy. This is class warfare (if you're not rich, as Karl Marx was not) or self-loathing (if you are rich, as Max Engels was). The need to soak the rich with punitive taxation, undermine private enterprise with burdensome and damaging over-regulation, and replace local charities with bureaucratic public programs frequently stems from a visceral desire to humble those who are at the top of the ladder of success.
This is not economics. This is not ethics, either. On a small scale, it's petty. When it becomes a philosophy of governance, it's poisonous. To make success at commerce a cause for wrath is to make prosperity impossible to achieve, at least legally. Ambitious people leave the private sector and enter the public sphere, turning their energies (and their egos) into building power bases rather than building thriving commercial enterprises.
A grasping government, it turns out, doesn't do much to pursue social justice anyway. Better to leave the creation of prosperity, and the pursuit of social justice, to the private sector.
Thursday, August 20, 2009
Market Morality: Why Free Markets?
Are free markets the right answer for economic development and a moral society?
As a people, Americans have shown a stronger preference for free markets than have the people of nearly all other nations. We instinctively trust in free enterprise vs. a planned economy, and view public services as naturally indifferent to customer needs and inefficient in delivering desirable products and services. This preference is a deep-rooted element in our culture, and goes back to before the American Revolution, when the King and Parliament were in faraway London, and the early colonists had no one to rely on but themselves. Since then, fresh waves of immigrants, fleeing rigid and rickety economies in Europe and elsewhere have preserved and reinforced our ancient habit of relying on ourselves and our neighbors, rather than our “public sector”, for providing us with food, shelter, and other goods and services.
Yet today we are experiencing perhaps the deepest disillusionment with free markets since the Wall Street Crash of 1929. Last year saw the meltdown of financial institutions and financial markets across the globe. Unemployment and foreclosures skyrocketed. Meanwhile, 401(k) values and retirement investments crashed. Whole sectors of our economy, such as investment banks, home builders, and auto manufacturers, saw bankruptcies on a massive scale. What went wrong? Who shoulders the blame? How can we fix our economy to keep this from happening again?
One cry that has risen across the country is outrage over the failures of Wall Street and its high-paid managers and executives. Financial firms placed huge bets on exotic instruments, and when things went sour our Federal government had to pour billions (or maybe trillions) into insolvent firms to keep the rest of our economy from going into a meltdown. Meanwhile, the CEOs who led their firms into collapse collect hundreds of millions of dollars in “performance bonuses” and “golden parachutes”. Why are ordinary Americans being forced to pour so much money into the pockets of the same men who undermined our prosperity?
The answer, of course, is to try to protect what is left of our own prosperity. Saving the paychecks of failed CEOs is an unfortunate side effect of bailing out our nation’s credit system. These men are ruined in reputation regardless. (Many are ruined in wealth as well, as this recession has savaged asset holders with a ruthlessness rarely seen in economic downturns). But to let the nation lose its great financial institutions would be a calamity?
Why would it be so bad? Perhaps you don’t care a whit about the New York Stock Exchange, or the prime rate, or the yield curve. You just want to earn a living and put something away for retirement. The credit system isn’t something you use every day, so who cares if it has a tough year?
The reason why you care is because you almost certainly use the credit system for your personal life. I’m not talking about checking accounts or credit cards. Those are useful (almost necessary), but that’s just the mechanics of one part of our credit system. The part of the system that affects our daily lives, and that went into jeopardy, is the part that loans money. You may not be a customer for T-Bills or credit default swaps. But how many times have you paid cash for a house? Or a car? Nearly all such purchases are made on credit, and the failures of Citibank and GMAC go right to the use of mortgages and car loans for ordinary Americans to make big-ticket purchases.
The bigger question is, What Next? Was this a market failure? Or is the idea of markets a deeper failure? How can our economy serve society and its members best, through free enterprise or through public activism?
In the real world, of course, there is always some mix of the two. In the most laissez-faire state (Hong Kong is a good example), government still regulates financial markets (as well as providing infrastructure, public safety, etc.). In the most totalitarian states (North Korea, for example), private property still exists, though it is effectively limited to personal effects such as clothing, furniture, tools and such. But the emphasis between private vs. public sector is quite different for these two nations, and the results are also vastly different.
So what is the proper mix? When is the state the solution, and at what point does the state become the problem? What is the proper aim of our economic system? Is it to create prosperity or advance social justice? Is it to enable personal freedom, or generate the greatest wealth for the greatest number? Are public officials honest brokers or empire-building egoists?
It’s my aim to explore those questions here at Market Morality, and shed some light on what has become the defining question of today’s political debate.
As a people, Americans have shown a stronger preference for free markets than have the people of nearly all other nations. We instinctively trust in free enterprise vs. a planned economy, and view public services as naturally indifferent to customer needs and inefficient in delivering desirable products and services. This preference is a deep-rooted element in our culture, and goes back to before the American Revolution, when the King and Parliament were in faraway London, and the early colonists had no one to rely on but themselves. Since then, fresh waves of immigrants, fleeing rigid and rickety economies in Europe and elsewhere have preserved and reinforced our ancient habit of relying on ourselves and our neighbors, rather than our “public sector”, for providing us with food, shelter, and other goods and services.
Yet today we are experiencing perhaps the deepest disillusionment with free markets since the Wall Street Crash of 1929. Last year saw the meltdown of financial institutions and financial markets across the globe. Unemployment and foreclosures skyrocketed. Meanwhile, 401(k) values and retirement investments crashed. Whole sectors of our economy, such as investment banks, home builders, and auto manufacturers, saw bankruptcies on a massive scale. What went wrong? Who shoulders the blame? How can we fix our economy to keep this from happening again?
One cry that has risen across the country is outrage over the failures of Wall Street and its high-paid managers and executives. Financial firms placed huge bets on exotic instruments, and when things went sour our Federal government had to pour billions (or maybe trillions) into insolvent firms to keep the rest of our economy from going into a meltdown. Meanwhile, the CEOs who led their firms into collapse collect hundreds of millions of dollars in “performance bonuses” and “golden parachutes”. Why are ordinary Americans being forced to pour so much money into the pockets of the same men who undermined our prosperity?
The answer, of course, is to try to protect what is left of our own prosperity. Saving the paychecks of failed CEOs is an unfortunate side effect of bailing out our nation’s credit system. These men are ruined in reputation regardless. (Many are ruined in wealth as well, as this recession has savaged asset holders with a ruthlessness rarely seen in economic downturns). But to let the nation lose its great financial institutions would be a calamity?
Why would it be so bad? Perhaps you don’t care a whit about the New York Stock Exchange, or the prime rate, or the yield curve. You just want to earn a living and put something away for retirement. The credit system isn’t something you use every day, so who cares if it has a tough year?
The reason why you care is because you almost certainly use the credit system for your personal life. I’m not talking about checking accounts or credit cards. Those are useful (almost necessary), but that’s just the mechanics of one part of our credit system. The part of the system that affects our daily lives, and that went into jeopardy, is the part that loans money. You may not be a customer for T-Bills or credit default swaps. But how many times have you paid cash for a house? Or a car? Nearly all such purchases are made on credit, and the failures of Citibank and GMAC go right to the use of mortgages and car loans for ordinary Americans to make big-ticket purchases.
The bigger question is, What Next? Was this a market failure? Or is the idea of markets a deeper failure? How can our economy serve society and its members best, through free enterprise or through public activism?
In the real world, of course, there is always some mix of the two. In the most laissez-faire state (Hong Kong is a good example), government still regulates financial markets (as well as providing infrastructure, public safety, etc.). In the most totalitarian states (North Korea, for example), private property still exists, though it is effectively limited to personal effects such as clothing, furniture, tools and such. But the emphasis between private vs. public sector is quite different for these two nations, and the results are also vastly different.
So what is the proper mix? When is the state the solution, and at what point does the state become the problem? What is the proper aim of our economic system? Is it to create prosperity or advance social justice? Is it to enable personal freedom, or generate the greatest wealth for the greatest number? Are public officials honest brokers or empire-building egoists?
It’s my aim to explore those questions here at Market Morality, and shed some light on what has become the defining question of today’s political debate.
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