Are public hangings an essential feature of capitalism? Or, can we trust in principle based morality?
This is not a trivial question. The child like and pseudo religious belief that the free market will, by itself, right all wrongs in time, a belief adhered to by Alan Greenspan and other groupies of Ayn Rand, is at the heart of our financial crisis and the crisis of capitalism. This Greek tragedy was played out at Enron, Lehman Brothers, and now Goldman and BP. It is the failed reliance on “rational self-interest” as a moral code.
The question is whether corporate executives are capable of adhering to principled behavior, behavior that supports a good other than their own, in the absence of punishment of significant severity to balance out the significance of potential rewards for unprincipled behavior.
Extreme rewards cause the mind’s eye to be severely out of focus and nothing serves as well to focus the mind as the anticipation of hanging in the village square at sunrise. So it appears that we must periodically publicly execute an executive to assist us to become principled. It would be nice if they didn’t make themselves such convenient and obvious targets.
I have been in the corporate world long enough to know two things: most executives are principled and do seek to adhere to fundamental values; and, there are companies and there are subcultures in which the value of “winning” as defined by financial performance alone, completely overwhelms any other morality.
On June 10th Goldman Sachs stock hit a one year low after another report of legal problems. This time the SEC is investigating a mortgage investment Goldman bundled and sold in 2006. They were already investigating possible fraud involved with an investment Goldman created called Abacus, a CDO, that was allegedly set up to enable Paulson & Co. to take short positions against this basket of what they believed to be distressed mortgage securities, while at the same time marketing this to their customers.
This was obviously not set up on the Deming philosophy of “delighting” your customers. If you are selling something you have created to your customers while at the same time betting against it, you are shafting your customers and you are, therefore, not trustworthy. The morality of this is simple.
What proves to me, beyond a reasonable doubt, that Goldman has not learned the lessons of principle centered leadership is not the above charges. It is the pathetic game being played with a Congressional Commission investigating Goldman’s dealings.This week the Wall Street Journal reported that…
A commission probing the financial crisis denounced Goldman Sachs Group Inc., saying the firm first dragged its feet over requests for information then dumped hundreds of millions of pages of documents on the panel.
This is an old and tired lawyer’s trick: You want documents? OK, here is a truckload of documents. See what you can find! And the investigators are so overwhelmed with irrelevant documents that they never find what they are looking for. As the police tell young thieves everyday, “If your not guilty, why are you running away and making yourself look guilty?” The Goldman legal team is either tacitly admitting guilt or is too dumb to know what “guilty” looks like.
The virtual collapse of every major Wall Street financial firm was not sufficient to awaken the spirit of moral conduct or the sensibility of moderation. The intervention of the government, required to prevent the collapse of the entire financial system, allowed many of these executives to obfuscate their own participation in the events that led up to that disaster and caused their minds eye to be blurred to consequences of their own behavior.
Before I was a parent, and a student of behavior modification and the power of positive reinforcement, I was convinced that I could raise my children without ever resorting to the “old way” of punishment for bad behavior. Nothing humbles one as well as parenting. I did resort to punishment, sparingly, as I realized that even the most superior children (my own!) occasionally needed to experience the pain associated with misconduct. But, you hope that as one matures, the intellect takes over, and the ability to adhere to moral principles, religious or otherwise, will be sufficient to keep behavior within acceptable control limits.
But, I fear that the more one is paid into the millions, the more one develops a childlike need to test the limits of the environment, to exceed the bounds of what is obviously “right conduct” until one once again one must contemplate the significance of a well constructed scaffold erected in the village square.
Great stuff Larry, go get ’em.
Dear Larry, As I have said before, I really like your writing. Why don’t you, at some point in time, bundle the best of these Meditations and publish them? I would be your first customer… EBBF might even publish them or at least share them with our members.
Again, many thanks for these gems of wisdom.
Our view of capitalism is based on Adam Smith’s thoughts mainly as written in his “Wealth of Nations” book. The concept people follow is that “self-interest promotes the general welfare.” As I read a more current book, David Cay Johnston’s “Free Lunch,” Mr Johnston states that Smith also wrote that “unchecked self-interest [greed], especially when aided by the government will spoil the benefits of capitalism…The law cannot prevent people from meeting (for self-interest), but it should not facilitate those meetings.” I see two main underlying causes for the financial crises. The first is that the government has allowed the stock market to operate as a gambling operation, which it regulates or prohibits in every other area of our lives. A stock proce should represent how well a company is performing. The only transactions that should be allowed are the buying (for possession) and selling (for release) of stock. Selling short then should not be allowed because it is overt gambling and the person never really owns the stock. The second cause is the misguided objective of most companies. I assume that most companys’ objective is to maximize profits for their stockholders. The objective should be to maximize the welfare of the employees and sockholders. Both must be affected since the employees are supplying the activities and the stockholders are supplying the funding. A client of mine in Utah is privately held and its mission is to optimize the way of life of its employees. That measn to satisfy as many of the employees’ needs as possible. The company must make a profit in order to do this, but by having welfare as an objective gives the company’s operation a completely different feeling. The employees know why they do what they do and can see a benefit from it. The owner could possibly be making more money, but he realizes that he can only use so much and a satisfactory life is more important than maximizing profit. This concept has inherent checks and balances since we must still make a profit. Since that is not the ultimate goal, we do not becmome obsessed with it.
Thank you George. I might do that at some point.
Don, thanks for the comment. I am certainly a believer in capitalism in the sense of private ownership of capital, private decision making, and yes… pursuing self interest. But, every “interest” requires a degree of moderation and balance. My main point, a question really, is whether mankind is going to become more mature, mature to the point of self-regulation… not requiring the hanging in the village square. The current evidence points to the opposite, doesn’t it.
Jack Welch is also a big believer in ‘public hangings’, in the context of reinforcing corporate norms and expectations. It works on several levels, the most obvious is that it’s a deterrant to others contemplating the same types of action. But on another level, it works to show the majority of employees (or citizens) that inappropriate behavior is punished, thus creating a sense of fairness and justice. In this case, we perceive that the big bonuses are still paid and no one is held accountable, even those who created the financial mess that impacted all of us. Thus there is no sense of fairness and justice.
Ultimately, power corrupts, and even with a justice system in place, there will always be people who bend and break rules to their own advantage. Without a justice system or a set of checks and balances in place, it would be even worse.
Scaffold, perhaps. But at least some punishment.
Have you heard of Schelling and Ross Hammond? They’ve used computers to create simulated societies and found that all societies turned honest as long as wrong-doers are caught. And not even all of them, just enough to make others scared, and for the “catching” to be random and not have any group in society “above the law.” See an article about this:
Then see figure 3, related to Hammond’s model of social corruption.
I appreciate your comments and have written letters to the editor regarding how Ayn Rand, educated as a novelist and playwright in Russia, has influenced the Fed Chair and many others and in the process brought our country to near disaster. Now we have the Tea Party. We need rules and referees in business just like NCAA basketball does. Can you imagine Duke v. Carolina without referees and expecting players to call fouls? How could we leave the financial industry, or other enterprises for that matter,to their own devices with a leadership moral compass focused solely on stockholder value and personal wealth?