Why Fairness Won’t Make Us Poor
This page is a sub-page of our page on Humanity Inc. – From Corporation to Cooperation.
• SECI-ASR (Self-Empowered Community Initiative for Augmented Social Resilience)
• The Humanisation of Globalisation
• The New Class War – Saving Democracy from the Metropolitan Elite
• The System – Who Rigged It?, How We Fix It
• The New Corporation – Why “Good” Corporations are Bad for Democracy
• The Tyranny of Merit – What’s Become of the Common Good?
• Moral Capitalism: Why Fairness Won’t Make Us Poor, by Steven Pearlstein, St. Martin’s Griffin, 2020 (2018).
Other relevant sources of information:
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/////// Quoting Pearlstein: Moral Capitalism (2020, back cover):
THIRTY YEARS AGO, “greed is good” and “maximizing shareholder value” became the new mantras woven into the fabric of our economy, politics, and business culture. Free market capitalism has lifted more than a billion people from poverty around the world. But in the United States, most of its benefits have been captured by the richest 10 percent, and it has provided justification for squeezing workers, cheating customers, avoiding taxes and leaving communities in the lurch. As a result, Americans are losing faith in the free market – and the democratic institutions that support it.
In Moral Capitalism Pulitzer Prize-winning journalist Steven Pearlstein chronicles our descent and challenges the theories being taught in business schools and exercised in boardrooms nationwide. Missing from our current model are vital elements recognized long ago by Adam Smith and Charles Darwin – the mutual trust and cooperation necessary for capitalism to survive and thrive. Pearlstein shows how rising inequality of incomes and opportunity have eroded that social capital, and how restoring fairness need not come at the expense of economic growth. He concludes with bold steps to create a shared prosperity and revive our faith in American capitalism.
/////// End of Quote from Pearlstein: Moral Capitalism
/////// Quoting Pearlstein: Moral Capitalism (2020, pp. 5-8):
To understand how we got to this point, we have to travel back to the mid-1970s. After decades of dominating U.S. and foreign markets many of America’s biggest and most successful corporations had become complacent and lost their competitive edge. They were less efficient, less innovative and less willing to take risk. Excessive government regulation had raised costs and sapped the dynamism of sectors such as transportation, communication, finance and energy, with government officials dictating which companies could compete, what services they could provide, what prices they could charge and what profits they could earn. Overzealous antitrust enforcement had prevented mergers among rivals that would have allowed them to achieve economies of scale. Unions had pushed wages and benefits to unsustainable levels, driving up prices and draining companies of the capital needed for investment and modernization. Loose interest-rate policy at the Federal Reserve and overspending by Congress had triggered double-digit inflation.
All that was happening at a time when European and Japanese exporters were beginning to make inroads into the American market. It began with shoes, clothing and toys, then spread to autos, steel, consumer electronics, computers and semiconductors, cameras, household appliances, chemicals and machine tools. Initially, the appeal of these foreign products was that they were cheaper, but before long these foreign firms began to offer better quality and styling as well. By the time American firms woke up to the competitive challenge, many were already playing catch-up. In a few industries, it was already too late.
Withe their costs rising and their market share declining, the large blue-chip companies that had dominated America’s postwar economy suddenly found their profits badly squeezed – and their share prices falling. Although few remember it today, the Dow Jones index, reflecting the share prices of the 30 largest industrial companies, essentially ran in place for the ten years between 1972 and 1982, resulting in a lost decade for investors. Indeed, it was worse than that. When adjusted for inflation, the Dow lost half its value over that period.
By the mid-1980s, serious people were wondering if the days of American economic hegemony were quickly coming to an end. When Japan’s Mitsubishi conglomerate purchased Rockefeller Center from the descendants of America’s most celebrated business mogul in 1989, it seemed to many as if the American Century had come to a premature and inglorious end.
“The central task of the next quarter century is to regain American competitiveness,” declared MIT economist Lester Thurow in a widely read jeremiad, The Zero-Sum Solution. Blue-ribbon panels were commissioned, studies were published, hearings held. In the corridors of government, at think tanks and business schools, on the covers of magazines, there was a sense of urgency about America’s industrial decline and a determination to do something about it. And do something they did.
With support both from Republicans and from a new generation of centrist Democrats, federal and state governments deregulated whole swaths of the economy, unleashing a burst of competition from upstart, low-cost rivals in airlines, trucking, freight rail, telephony, financial services and energy. Government spending was cut, along with taxes. Antitrust regulators declared that big was no longer bad, unleashing a flood of mergers and acquisitions. New trade treaties were negotiated that lowered tariffs while opening oversea markets for American products.
Across the manufacturing sector, inefficient plants were shuttered, production was re-engineered, employees laid off and work shifted to non-union shops down South or overseas. Companies that once employed their own security guards, ran their own cafeterias, operated their own computer systems and delivered products with their own fleet of trucks outsourced those “non-core” functions to cheaper, non-unionized specialty firms. Over-indebted companies used the bankruptcy courts to wash their hands of pension and retiree health-care obligations and force lenders to accept less than what they were owed. Japanese management gurus were brought in to lower costs, improve quality and create new corporate cultures.
Meanwhile, in the fast-growing technology sector, established giants selling mainframes and tape drives suddenly found themselves out-innovated and out-maneuvered by entrepreneurial startups. peddling minicomputers, disc drives and personal computers that were smaller, cheaper, easier to use and surprisingly powerful.
The transformation was messy, painful, contentious and often unfair, generating large numbers of winners and losers – exactly what the economist Joseph Schumpeter had in mind when he identified “creative destruction” as the essential characteristic of capitalism.
Along the way, the old social contract between companies and their workers – and more broadly between business and society – was tossed aside. No longer could workers expect pensions, full-paid insurance, job security or even a Christmas bonus from their employers. And no longer would business leaders feel the responsibility, or even the freedom, to put the long-term interests of their country or their communities ahead of the short-term interests of their shareholders. Chief executives found it useful to cultivate an aura of ruthlessness, winning sobriquets such as “Neutron Jack” and “Chainsaw Al.”
And it worked. By the mid 1990s, the hemorrhaging stopped and corporate America was again enjoying robust growth in sales, profits and stock prices. Chief executives and Wall Street dealmakers were lionized on magazine covers and on the front pages of newspapers, their dalliances chronicled in the gossip columns, their soaring pay packages a source of both fascination and controversy. Students at the best universities flocked to business schools, and from there to high-powered jobs on Wall Street or at management consulting firms. Individual investors began piling into the stock market through new tax-exempt retirement accounts and a dazzling array of new mutual funds. For the first time, business books with titles like In Search of Excellence, Reengineering the Corporation and Competing for the Future regularly made it onto the bestseller lists.
America – and American capitalism – was back, stronger and more globally competitive than ever.
/////// End of Quote from Pearlstein: Moral Capitalism
/////// Quoting Pearlstein: Moral Capitalism (2020, pp. 13-18):
Crucial to the revival of Xerox and other American corporations were three ideas used by political ad business leaders to justify these dramatic changes in the relationship between companies and their customers, their workers, their investors and with the rest of society:
Idea #1: The government was significantly responsible for the decline in American competitiveness. High taxes had discouraged investment and risk-taking by individuals and businesses, while overzealous regulation had driven up costs and snuffed out innovation. For Ronald Reagan and his heirs in the Republican Party, along with a supporting chorus of economists and business executives, it became economic gospel that cutting taxes and eliminating regulations would increase incentives to work and invest, and thereby increase the supply of goods and services produced by the economy. They called it supply side economics.
“Government’s view of the economy could be summed up in a few short phrases,” quipped Ronald Reagan in belittling the liberal approach to economic policy. “If it moves, tax it. If it keeps moving, regulate it. And it it stops moving, subsidize it.”
Idea #2: The sole purpose of every business is to deliver the highest possible financial return to its investors. This was the only way to make sure that managers would take tough actions – cutting costs, laying off workers, selling less profitable divisions – to ensure a company’s survival in hyper-competitive global markets.
“There is only one social responsibility of business – to use its resources and engage in activities designed to increase its profits,” conservative economist Milton Friedman wrote in 1970 in the New York Times Magazine. “Anything else,” he declared, was “unadulterated socialism.”
Idea #3: No matter how unfair it might seem to cut taxes for the wealthy, no matter how ruthless a company might have to be in its dealings with workers and consumers, no matter how unequal the distribution of income and wealth might become, we must ignore and dismiss such moral concerns as naive and ultimately self-defeating. Such unpleasant outcomes were seen as the inevitable and unavoidable features of a free market system that had lifted much of humanity from a subsistence existence in which it had been trapped for millennia, generating the greatest prosperity for the greatest number. For that reason alone, free markets must be accepted as fair and just. Let’s label that view “market justice.”
Beginning in the 1980s, these three ideas – supply side economics, maximizing shareholder value, and market justice – were woven into the everyday rhetoric of economists, business leaders and conservative politicians, providing the economic, political and moral legitimacy for dismantling the welfare and the regulatory state and jettisoning a complacent business culture. In time, they came to be reflected in a wide range of government policies, corporate strategies and business practices. And it was those policies, those strategies and those practices that, by the mid 1990s, had succeeded in restoring the competitiveness of the American economy.
However, when the competitiveness challenge had been overcome and the American economy was once again back on top, free market ideologues and those with vested economic interests continued to push these ideas to extremes never envisioned by those who first proposed them – pushed them so far, in fact, that they have now become a morally corrupting and self-defeating economic dogma that threatens the future of American capitalism. Almost everything people now find distasteful about it can be traced to these three flawed ideas.
The mindless animosity toward all regulation, for example, has now provided a rationale for handing over the keys to independent regulatory agencies to lobbyists and executives from the very industries that are supposed to be regulated. In a very real sense, the foxes have been put in charge of the chicken coop, and their ambitions go well beyond “reforming” the agencies or “restoring the balance” between government and business. Their aim is to hollow out these agencies from the inside – to maintain the fiction that the government is still protecting workers, consumers, investors and the environment while, in reality, trusting markets to restrain predatory business behavior. These anti-regulatory zealots speak only of the costs of regulation but never of the benefits; of the jobs lost but never the lives saved; of efficiency but never fairness.
After gaining control of both the White House and Congress in 2016, Republicans moved aggressively to rescind dozens of Obama-era regulations that would surely strike most Americans as fair and reasonable. These include a rule setting strict environmental standards for oil and gas drillings in national parks and wildlife refuges, a rule barring federal student loans for at-profit colleges whose graduates never get jobs and a rule requiring financial advisers to act in the best interest of their customers. They include a rule preventing miners from dumping debris into nearby rivers and streams and a rule preventing cable and phone companies from collecting and selling information about the Internet sites visited by their customers. They even set out to repeal a long-standing rule preventing restaurant owners from taking waiters’ tips for themselves.
Supply side tax fantasies, meanwhile, have so warped the thinking of Republican politicians that many genuinely believe they can create jobs and raise wages for the struggling working class by lavishing a trillion dollars of tax relief on businesses and investors – the very businesses and investors who have spent the last 25 years eliminating working-class jobs and driving down working-class wages. The jihad against taxes has progressed to the point that any Republican politician who even contemplates raising any tax at any time is certain to be villified by the conservative media and driven from office by an unforgiving and well-financed conservative mob. Even long-cherished conservative ideals such as balancing budgets and investing in infrastructure have been tossed overboard in the relentless pursuit of tax cuts, which are now the reflexive Republican solution to any problem.
A similar single-mindedness has taken hold in the private sector around maximizing shareholder value. For too many corporate executives and directors, that mantra has provided a pretext for bamboozling customers, squeezing employees, evading taxes and engaging in endless rounds of unproductive mergers and acquisitions. It has even provided a pretext for defrauding shareholders themselves. The executives at Enron, WorldCom, HealthSouth and Waste Management who concocted elaborate schemes to inflate reported revenues and profits in the late 1990s rationalized their actions as necessary steps to prevent share prices from falling. It has become the end that justifies any business means.
The obligation to maximize shareholder value has also led business leaders to abandon their role as proud stewards of the American system. In today’s business culture, it’s hard to imagine them as stewards of anything other than their own bottom lines. But it wasn’t always this way.
Working through national organizations such as the Committee for Economic Development, the The Business Council and Business Roundtable, the chief executives of America’s major corporations during the decades after World War II supported proposals to increase federal support for education and basic research, guarantee worker pensions, protect the environment, improve workplace safety and set a national goal of full employment. Although most of the chief executives were Republicans, business organizations took pains to be bipartisan and maintain close ties to politicians of both parties. Some of their motives were self-serving, such as reducing the lure of socialism or unionization, but there was also a genuine belief that companies had a duty to balance their own interests with those of society. As General Motors chairman Charlie Wilson famously put it at his confirmation hearing to be secretary of defense, ” I always thought that what [was] good for the country was good for General Motors, and vice versa.”
At major business organizations today, that sense of collective social responsibility has given way to the grubby pursuit of narrow self-interest, irrespective of the consequences for the rest of society. While continuing to declare their bipartisanship, business groups such as the U.S: Chamber of Commerce, the Business Roundtable and the National Federation of Independent Businesses have essentially become arms of the Republican Party. For the most part, these organizations are now missing in action on broad issues they once declared as priorities, such as climate change, health-care reform, immigration, infrastructure investment, education and balancing the budget, occationally paying lip service but expending no political capital.
“Big business was a stabilizing force, a moderating influence in Washington,” Steve Odland, president of the Committee for Economic Development and former chief executive of Office Depot, told me several years ago. “They were the adults in the room.” Nobody, including Odland, thinks business leaders play that role today.
And what of the third idea, market justice? For the most part, Americans are no longer willing to accept the glaring injustices created by the economic system simply because that system provides them with a higher standard of living. For starters, many feel their standard of living is now falling, not rising. And even for those living better than ever, the American capitalism they experience feels more and more like a morally corrupt and corrupting system in which the prevailing ethic is every man for himself. Old-fashioned norms around loyalty, cooperation, honesty, equality, fairness and compassion no longer seem to apply in the economic sphere. As workers, as consumers, and even as investors, they feel cheated, manipulated and disrespected.
I regularly ask undergraduates at George Mason University, where I teach, about their career aspirations, and am struck by how few have any interest in working for a business (those who do invariably want to work for a startup run by a small group of idealists like themselves). It is the rare student who volunteers a desire to be rich – not because they wouldn’t enjoy what the money could buy them, but because they wouldn’t want to engage in the unsavory behavior they think necessary to attain it. To them, market justice sounds like a contradiction in terms.
/////// End of Quote from Pearlstein: Moral Capitalism
/////// Quoting Pearlstein: Moral Capitalism (2020, pp. 25-39):
Is Greed Good?
In 2008, on the eve of the global financial crisis, Drexel University used the pomp and circumstances if its annual commencement ceremony to confer an honorary degree on one of Wall Street’s most famous investors.
Carl Icahn had amassed a fortune estimated at $27 billion by buying large positions in companies he considered badly managed, then using his ownership positions to force managers and directors to take whatever steps he deemed necessary – shutting plants, selling off divisions and assets, slashing worker pay and pensions, reducing investments, buying back shares – to boost the companies’ stock prices and allow him to sell out at a handsome profit. The strategy was so effective that just the news that Icahn had taken an interest in a company could boost the stick price by 10 percent. His targets have included Trans World Airlines, U.S. Steel, Phillips Petroleum, Texaco, Time Warner, eBay, Yahoo!, Apple and, most recently, Xerox.
When he started in the mid-1908s, people like Icahn were referred to pejoratively as “corporate raiders,”greenmailers” and “asset strippers,” sneered at by the business press, criticized by business school professors and shunned by the business establishment. It should tell you how much our sensibilities have changed that Icahn is now commonly referred to as an “activist investor,” lionized on the cover of Time magazine as a “Master of the Universe” and celebrated with an honorary degree.
“As a leading shareholder activist, Mr. Icahn believes his efforts have unlocked billions of dollars in shareholder value,” Drexel’s president declared in awarding him an honorary doctorate of business administration, awkwardly sidestepping the question of what Drexel believed. To nobody’s surprise, there was no mention of the hardball tactics Icahn used to unlock that shareholder value and amass his personal fortune. Rather, the citation went on to praise Icahn’s generosity in giving away a portion of that fortune to benefit the sick and the homeless.
As the philosopher Charles Karelis has observed, academic ceremonies like the one that played out in Philadelphia – what was said as well as what was left out – perfectly illustrate the moral paradox of free market capitalism. The financier celebrated that morning had played an outsized role in an economic system that had conferred on every member of that day’s graduating class a standard of living well beyond the reach of those still trapped in societies where free market capitalism does not exist. Yet despite those incalculable benefits, we are reluctant to praise the self-interested traits and aggressive tactics that have been vital to the success of that system. If such traits and tactics are not vices, we don’t exactly view them as virtues either.
Among the first to note this moral paradox between what he called “private vices and public benefits was Bernard Mandeville. Born in the Netherlands in 1680, Mandeville studied medicine and philosophy at Leiden before moving to England, where he found both popularity and controversy as a writer. Mandeville’s most famous work was The Fable of the Bees, which told of a flourishing hive of bees that, though relentless and sometimes dishonest in their individual pursuit of self-interest, had achieved a level of collective comfort and pleasure in which “the very poor liv’d better than the rich before.” The industrious bees, however, were not content merely to enjoy their luxurious new paradise – they begged the gods for a more selfless virtue. So Jove grants them their wish to rid themselves of all their selfish vices, and almost immediately the bees discover that they are no longer driven to compete with each other. Their prosperity disappears, apathy sets in and the hive is left vulnerable to a devastating attack. The few bees that survive take refuge in the hollow of a tree where their newfound virtue and thrift condemn them to a simple, impoverished existence.
Mandeville said his intent was to “shew the Impossibility of enjoying the most elegant Comforts of Life that are to be met with in an industrious, wealthy and powerful Nation, and at the same time be bless’d with all the Virtue and Innocense that can be wish’d for in a Golden Age.” Three hundred years later, this dilemma still confounds. We are still looking for ways to reconcile our moral distaste for the ruthless pursuit of self-interest with our admiration and appreciation for the benefits it generates.
Amorality on Wall Street
Nothing captures this ambivalence about capitalism better than Wall Street, which for many has come to represent all that is right and all that is wrong with the free market economy. And no firm has come to epitomize the Wall Street ethic more than Goldman Sachs. In the seven years leading up to the recent financial crisis in 2008, Goldman was the most respectable and profitable of the Wall Street investment banks,. Two of its chief executives had as secretary of the Treasury. Its bankers and traders were thought to be the smartest and toughest on Wall Street. So coveted was a seat at Goldman’s table that, at one point, more than half of the graduating seniors at some of the country’s most prestigious colleges signed up to be interviewed by a Goldman recruiter.
By April 2010, however, seven of Goldman’s top executives found themselves testifying before a Senate Permanent Subcommittee on Investigations, which had spent two years poring through the firm’s internal documents to determine what role Goldman had played in the financial crisis.
In the years leading up to the crisis, Goldman had made billions of dollars packaging residential and commercial mortgages into bond-like financial instruments and selling them to hedge funds, pension funds, insurance companies and other sophisticated investors – a process known as “securitization.” When investor demand for these securities began to outstrip the available pool of mortgages that could be packaged, Goldman led the way in creating “synthetic” securities whose value tracked that of the real thing – in effect, allowing more people to invest in the mortgage market than there were actual mortgages for them to buy. And that these securities might some day fail to deliver on their promised cash flow, Goldman made it possible for them to hedge their bets with an instrument that amounted to an insurance contract know as a “credit default swap.”
All of these activities put Goldman at the center of what came to be known as the “shadow banking system” that, by the first decade of the twenty-first century, had become larger than the traditional banking system. The shadow banking system flooded the economy with cheap credit, inflated real estate prices and sent Wall Street profits and bonuses to levels never before imagined.
By 2007, however, there were some who were beginning to realize that many of the original loans should never have been made, that the prices of the securities and the real estate that backed them were unsustainable and that the credit bubble was about to burst.
One such skeptic was a hedge fund manager named John Paulson, who began looking for a way to profit from the market’s inevitable collapse. Paulson called Goldman and asked if the bank would be willing to create a security backed by a basket of particularly risky subprime loans so that he could buy credit default swaps tied to that security – swaps that would generate handsome profits if, as expected, those securities failed to pay off. Paulson was a big Goldman client, so the bank was not only willing to accommodate his request but even allowed his associates to recommend specific mortgages for the package.
Until the 1980s, investment banks would compete to demonstrate to clients how trustworthy they were, and in that earlier era, the Goldman name was the gold standard. As the firm’s legendary senior partner Gus Levy’ famously put it, Goldman means to be “long-term greedy,” never cutting corners to earn a quick buck and always putting clients’ interests before the interests of the firm. When a blue-chip firm like Goldman put its name on s securities offering, it was a signal to investors that the partners at Goldman were giving it their own seal of approval. It wasn’t necessarily a sure bet – nothing in finance is – but you could rest assured that it was an honest bet.
By 2007, however, the time horizon for Goldman’s greediness had significantly shortened. Goldman was now willing to create for one client a security that was designed to fail, and then peddle it to other clients who were unaware of its provenance. The old presumption that an investment bank staked its reputation on the securities it underwrote had become a quaint anachronism.
Goldman’s duplicity, however, went far beyond that one security. For by that time Goldman, too, had concluded that the real estate market was about to crash and began quietly scrambling to reduce its own housing risk. Even as it was moving to protect its own portfolio, however, Goldman’s bankers were continuing to underwrite and sell securities that its executives knew were by some of the dodgiest mortgages from some of the dodgiest lenders.
In January 2007, Fabrice Tourre, a Goldman vice president, wrote an email to a friend that would later be unearthed by senate investigators: “The whole [edifice] is about to collapse any time now … The only potential survivor, the Fabulous Fab, … standing in the middle of all these complex, highly leveraged exotic trades he created without necessarily understanding all the implications of these monstrosities!!!
At the Senate hearings, incredulous senators, Republican and Democrat, demanded to know why Goldman executives had sold securities to valued clients that even their own employees had characterized as “crap.” The men from Goldman, however, were equally incredulous, failing to see why anyone would think there was anything wrong with what they did. Their answers were defensive, nitpicky and legalistic, and no purpose would be served by quoting them here. But if you will allow me a little license, here is a concise rendition of what they meant to say:
Senators, we operate in complex markets with other knowledgeable and sophisticated traders who spend all day trying to do to us what we do to them. What you find so strange or distasteful is, in fact, how the game is played.
In our world, in order for there to be a transaction, people must disagree about the value of the thing they are trading. The buyer thinks the price will go up, the seller thinks it will go down. Only one of them can turn out to be right. Finance is largely a zero-sum game – for every winner there is a loser.
As the middleman in these transactions, what Goldman or any of its 35,000 employees happen to think about a security is irrelevant. It is not for us to judge whether it is “good” or “bad” – it is for the market to do that. And the way the market does it is by determining the price. At $100, s bond might be s bad investment, but if you pay $10 for it, it could be quite good. If our sophisticated clients want to take a housing risk – or oil price risk, or interest rate risk – or if they want to hedge those risks – our job is to help them do that by finding somebody to take the other side of the bet, or by taking it ourselves.
As underwriters, market makers and buyers and sellers of credit insurance, we are constantly on the other side of transactions from our customers. In doing that, we are merely cogs in a marvelous system that efficiently allocates the world’s investment capital at the lowest price to those who can put it to the highest and best use, making us all better off. Within that context – a context well understood by our customers, our competitors and our regulators – we did nothing wrong and we have nothing to be ashamed of.
To those watching the exchange, it was as if the politicians and the financiers were from different planets. The senators imagined they were living in a world of right and wrong, good and bad, in which bankers owed a duty of honesty and loyalty to their customers and to the public that obligated them not to peddle securities they knew to be suspect. The men from Goldman by contrast, came from an amoral world of hypercompetitive trading desks in which customers were “counterpartners” and there was no right or wrong, only winners and losers.
“We live in different contexts.” Goldman chief executive Lloyd Blankfein told committee chairman Carl Levin, who at the outset of the hearing had chastised the bankers for their “unbridled greed.” For hours, as almost everyone on Wall Street sat glued to their screens watching the drarma play out, the two sides continued to talk past each other until an exasperated Levin finally gave up and gaveled the hearing to a close.
Over the next five years, the Justice Department and the Securities and Exchange Commission would extract record fines of $5.6 billion from Goldman, along with a grudging acknowledgement that it had knowingly misled its customers. Similar settlements, amounting to almost $200 billion, were reached with all the major banks. Yet through it all, Wall Street has continued to reject accusations that it did anything wrong, or that its practices and culture are fundamentally unethical or immoral.
“Not feeling too guilty about this,” Tourre emailed his girlfriend in January 2007. “The real purpose of my job is to make capital markets more efficient … so there is a humble, noble, and ethical reason for my job.” But then, after inserting a smiling emoji, he added, “Amazing how good I am [at] convincing myself!!!
Tourre, who reportedly earned annual bonuses as high as $2 million during his decade at Goldman, would later be convicted of six counts of civil fraud and fined $25,000. As the only Wall Street executive brought to justice in the wake of the 2008 crash, the young Frenchman became a symbol – some would say a scapegoat – of the financial crisis. After leaving Goldman, Tourre took up graduate studies in economics at the University of Chicago, where he was scheduled to teach an undergraduate honors seminar. Once word of his appointment leaked out, however, embarrassed university officials dropped him as the instructor.
The Hijacking of Adam Smith
That Fabrice Tourre chose to retreat to the University of Chicago was only fitting. Since the days of Nobel laureates Milton Friedman, George Stiegler and Gary Becker, Chicago has become the Vatican for an economic ideologybased on a holy trinity of self-interest, rational expectations and efficient markets. In time, this ideology came to be widely empbraced on Wall Street and in the business community, providing an intellectual justification not just for lower taxes, less regulation and free trade, but also hostile corporate takeovers, outsized executive compensation and a dramatic rewriting of the social contract between business and society.
The man held out as the patron saint of this ideology was the eighteenth-century Scottish philosopher Adam Smith. In his most famous work, An Inquiry into the Nature and Causes of the Wealth of Nations, Smith demonstrated that our “disposition to truck, barter and exchange,” driven by self-interest, had allowed millions of farmers, artisans and laborers to escape grinding poverty.
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest,” he wrote in one of the most famous passages in all economics. “We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Smith’s great insight was that as each of us goes about selfishly enhancing our own wealth, we unintentionally but magically – in his words, “as led by an invisible hand” – wind up enhancing the wealth of everyone else.
In pointing out the social utility of selfishness and self-regard, Smith was well aware of Bernard Mandeville’s fable of the bees. He was also drawing on more than a century of thinking by Enlightenment thinkers who rejected the traditional Catholic notion that wealth could only be acquired through evil and exploitation.
“It is as impossible for society to be formed and lasting without self-interest as it would be to produce children without carnal desire or to think of eating without appetite,” Voltaire wrote. “It is quite true that God might have created beings solely concerned with the good of others. In that case merchants would have gone to the Indies out of charity and the mason would have cut stone to give pleasure to his neighbor. But God has ordained things differently. Let us not condemn the instinct.
Looking back on centuries of war driven by religious zealotry, Voltaire saw in our commercial tendencies a better foundation for peace and social order. And it was Smith’s great friend and mentor David Hume who wrote of the civilizing effect of wealth in an essay celebrating luxury.
Today, Mandeville, Voltaire and Hume are remembered only by students of philosophy, but Smith’s “invisible hand” has become the defining metaphor around which a gospel of free markets as been constructed. If self-interest is the instinct that animates free markets, and free markets produce the most peace and wealth for the greatest number, then free markets must logically be the most moral of systems for organizing our economic affairs. In such a context, there’s no need for the bankers from Goldman to worry about whether any particular action or activity is write or wrong because every self-interested trade ultimately serves this higher social and moral purpose. And from there it is only a short leap to the view that if some self-interest is good, more of it would be even better.
“The point is, ladies and gentlemen, that greed, for lack of a better word, is good,” declares Gordon Gekko, the fictionalized fund manager in Oliver Stone‘s hit movie Wall Street. “Greed is right, greed works, Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed in all of its forms: greed for life, for money, for love, for knowledge has marked the upward surge of mankind.”
Director Stone, of course, meant to condemn greed, not to praise it, and Gekko is the villain of his morality play, a ruthless cad willing to do whatever it takes to make money – dismember companies, lay off thousands of workers, ruin families and screw other investors by spreading false rumors and trading on stolen inside information. But as professors of economics and philosophy regularly demonstrate to their students, it is easier to criticize greed than to distinguish it from more productive forms of self-interest. The classroom discussion follows a predictable pattern.
To the student who suggests that greed is wanting more than you need, the professor asks if it is greedy to want a BMW instead of a Ford Focus.
To those who speculate that greed is wanting more than you could ever need, the professor will ask if billionaire Mark Zuckerberg is greedy because he still gets up and goes to work every day, aiming to make more.
To those who would define greed as wanting something that hurts someone else, the professor asks if it would be greedy for you to abandon an employer who took a chance on you by hiring and training you when you were fresh out of school, just because a competitor had offered an extra dollar an hour in pay.
While we can acknowledge that greed is devilishly hard to define, that doesn’t mean that we shouldn’t try, or that we must accept any level of selfishness as morally benign. I would suggest that greed comes in two varieties, one that is personally debilitating, the other socially.
The first type we associate with King Midas, who desperately wished for the golden touch but wound up using it to turn his own daughter into gold. This greed is hunger for acquisition so excessive that it becomes a sickness or compulsion that prevents us from enjoying what we already have.
The other greed is an acquisitive selfishness so extreme that the harm it causes to others outweighs the benefit to ourselves. This greed leads to wasteful consumption and misallocation of scarce resources. It is the type of greed that requires a brutish indifference to the plight of others and offers a pretext for illegal or ruthless behavior. It is the greed the so undermines the faith, trust and confidence we have in each other that it leaves all of us less satisfied, economically and morally.
This latter is not just my characterization of greed. It is the one offered in 1759 by Adam Smith himself, in his earlier but oft-overlooked book The Theory of Moral Sentiments.
“How selfish soever man may be supposed,” Smith writes in the opening sentence, “there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”
As Smith sees it, it is not riches we seek but happiness, and the surest route to happiness is to have gained the respect and good opinion of others. Smith imagines that our behavior is driven by an imaginary interaction with what he calls the “impartial spectator” looking over our shoulder. In a genuinely moral man, this conscience becomes so ingrained that we rein in our selfishness and ambition to gain the respect of others. Eventually, this restraint leads to an even higher pleasure – self-respect.
“Man naturally desires not only to be loved but to be lovely,” he writes.
Smith takes great pain in Moral Sentiments to document our natural tendency to admire those who are rich and wrongly attribute their success to a higher moral character, which the rich come to believe of themselves. And this, complains Smith, leads them to believe that they no longer have to act in a moral fashion: “The disposition to admire, and almost to worship, the rich and powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary to establish the distinction of ranks and the order of society, is at the same time the great and most universal cause of the corruption of our moral sentiments.
Unlike the classical or Christian moralists, Adam Smith did not believe that the enthusiastic pursuit of personal wealth by itself was corrupting. Indeed, for Smith, success in commerce required the development of such laudable characteristics as economy, industry, prudence and honesty. As he saw it, the desire for “luxury” and the desire for “virtue” could be reinforcing – but only if self-interest were tempered by a concern for the well-being of others.
“How disagreeable does he appear to be.” he wrote, “whose hard and obdurate heart feels for himself only, but is altogether insensible to the happiness or misery of others.
Nor is Smith’s notion of a competitive market one that operates on Goldman Sachs’s principle of “buyer beware.”
“In the race for wealth, and honours, and preferments, he may run as hard as he can and strain every nerve and every muscle, in order to outstrip his competitors,” Smith wrote. “But if he should jostle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play.”
It is not just fair play that Smith requires, however. He also demands a fair distribution of economic rewards. The rich, he writes, “consume little more than the poor, and in spite of their natural selfishness and rapacity, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessities of life which would have been made had the earth been divided into equal portions among all its inhabitants.”
This, in fact, is Adam Smith’s first use of the phrase “invisible hand,” written more than a decade before the more famous passage in The Wealth of Nations. Rather than serving as justification for selfishness, however, this invisible hand is a metaphor for what he considered a natural instinct to share the fruits of communal labor. For Smith, it is a matter of simple “equity” that “they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged.”
I am hardly the first to try to rescue Smith from being portrayed as the cartoon cheerleader for selfishness and greed. Smith was a brilliant and insightful philosopher with a subtle and nuanced appreciation of individual motivation and collective behavior. For Smith, a man was never the self-regarding individualist conjured up by today’s free market purists, but a sentient, social animal whose motivations are complex and whose wealth and happiness depend on the wealth and happiness of others.
The real Adam Smith understood that the wealth of nations requires that our selfishness be restrained by our moral sentiments – sentiments that are so natural and instinctive that, in his words, they “cannot be the object of reason, but of immediate sense and feeling.” This insight would largely be ignored by the classical and neoclassical economists who built on Smith’s work. A century later, however, that insight would surface again in the pioneering work of an English naturalist and geologist.
Why Nice Guys Finish First
If Adam Smith’s invisible hand seems to provide the theoretical basis for a market system motivated by selfishness, Charles Darwin‘s theory of natural selection appears to invest it with a scientific imprimatur.
To the early social Darwinists, the ruthless, unrelenting competition for food, water, shelter and sexual partners that was responsible for the evolution of primates into humans also provided the template for the ruthless and unrelenting competition that plays out in the economic jungle of modern capitalism. Any effort by society to restrain that competition, they argued, or redirect rewards to those less talented, less ambitious and less successful would thwart the continued evolution of the species and the upward progress of civilization.
In time, social Darwinism’s focus on “survival of the fittest” – their words, not Darwin’s – would come to be embraced by racists, eugenicists and proponents of a “master race,” and be widely discredited. But today you can still hear the unmistakable echoes of that philosophy in the critiques of income redistribution and the burden that it imposes on “job creators.” You can hear it in the diatribes against “job-killing regulations” meant to protect workers and consumers from the predations of business. And you can hear it in their complaints about an economic safety net that has become a “hammock” for the lazy and the indolent.
But just as Smith’s invisible hand was hijacked by market fundamentalists who mischaracterized it or misunderstood it, so too have Darwin’s insights about evolution and natural selection.
In On the Origin of Species, published in 1859, Darwin theorized that it was our instinct for self-preservation – our “selfish gene” as the evolutionary biologist Richard Dawkins would later call it – that drove human evolution. In the struggle to survive and reproduce in an environment characterized by ruthless competition for limited resources, those with certain traits survived and reproduced in greater number. Over many generations, those useful traits were “naturally selected” and became embedded in the species.
But in his subsequent work, The Descent of Man, Darwin made clear that selfish genes did not necessarily produce selfish people. Quite the contrary, in fact. For among those traits that were naturally selected were instincts for cooperation and altruism that enhanced the ability of humans not only to survive, but to become the dominant species.
The most fundamental of such instincts was the selfless sacrifice made by parents on behalf of their offspring and, more broadly, of family members on behalf of each other. Even beyond the bonds of kinship, however, strategic cooperation among unrelated individuals had made it possible for certain tribes to prevail in conflict and competition others. Even within tribes, those who exhibited the reciprocal instinct to trust and be trusted tended to be more likely to be chosen as collaborators and as sexual partners. It was through such an evolutionary process that a “cooperative gene” – one no less powerful or important than the selfish one – became part of our nature.
Here’s Darwin: “There can be no doubt that a tribe including many members who, from possessing a high degree of the spirit of patriotism, fidelity, obedience, courage and sympathy, [and who] were always ready to give aid to each other and to sacrifice themselves for the common good, would be victorious over most other tribes; and this would be natural selection.
Like Smith, Darwin believed that these socially beneficial instincts manifest themselves in a deep-seated desire to be loved and respected. Those who were seen to reciprocate trust and cooperation were more likely to survive and prosper, while those who were greedy and selfish were shamed, shunned and punished. And it was from those early instincts that sprang the more elaborate moral, religious and legal norms and codes that govern our behavior today.
For most of our evolutionary history, writes David DeSteno, an experimental psychologist at Northeastern University, “it was far more likely that what led to success was strong social bonds – relationships that would encourage people to cooperate and lend support to one another …
But to establish and maintain relationships, people would have had to be fair, honest, generous, diligent and loyal. They would have had to be perceived as good partners. In other words, they would have had to behave morally.
Cooperative social behavior, of course, can be found in other animal species – birds that fly in formation, elk that roam in herds, ants that cooperate in colonies and bees in hives. Monkeys and apes commonly trade grooming favors. Antarctic penguins engage in an elaborate group hug to keep chick eggs warm before they hatch.
There is disagreement among evolutionary biologists as to whether this instinct for social cooperation evolved only at the individual level, or at the group level as well. While I won’t try to resolve that debate here, I find an experiment by geneticist William Muir to be highly instructive.
Chicken farmers had reasoned had reasoned that they could increase egg production by focusing their breeding on hens that laid the most eggs. Unfortunately, it turned out that the most productive hens were also the most aggressive, so that when the top-laying hens were bred and placed in the close quarters of the henhouse, many died from fighting. In the end, the higher death rate from all that alpha aggression more than offset the positive effects of the higher fertility of those that survived.
So Muir tried a different strategy. Rather than selecting the most productive hens for breeding, he found the cages in which the hens collectively produced the greatest number of eggs. Then h bred the entire group, irrespective of individual fertility. Within six generations, the death rate fell from 67 percent to 8 percent, while total egg production more than doubled. From this and similar experiments, Muir concluded that “group selection” offered a more powerful explanation for the natural selection of cooperative traits.
Recent brain research reveals that there is a chemical basis for cooperative and altruistic behavior. Scientists have found that when a person is confronted with a kindness or sign of trust from someone else, the brain releases a chemical known as oxytocin. The oxytocin, in turn, has the effect of making that person more likely to reciprocate with trust or kindness, setting up a virtuous cycle in which trust begets trust, altruism begets altruism and cooperation begets cooperation. Oxytocin levels are also found to correlated with levels of happiness.
Paul Zak, an economist and founding director of the Center for Neuroeconomics Studies at Claremot Graduate University, used a classic economic experiment to demonstrate the connection between trust and oxytocin, which he dubbed the “moral molecule.”
In the “trust game,” two people are each given $10 that they can walk away with at any time. Under the rules of the game, Player A is invited to give any of his $10 to an unknown Player B sitting in another room, with the stipulation that each dollar given to Player B would be matched by three additional dollars from the sponsors of the game. At that point, Player B must decide how much off the enhanced donation she will kick back to Player A.
If we are all selfish, greedy people who assume others to be so as well, then the rational decision by Player A would be to make no donation and walk away with his $10 windfall.And if, for some reason, Player A were silly enough to donate anything to Player B, then the selfish, greedy Player B would keep it all, with no reciprocation.
In fact, that’s not what happens. In Zak’s experiments, 90 percent of the A players donated something – on average betwee $3 and $4 of the initial $10 – with 95 percent of the B players reciprocating, most typically one dollar for each donated dollar. A players walked away from the game with an average of $14 and B players with $17. That is still not the maximally trusting and cooperative outcome, which would be for A players to donate their entire $10 and B players, now with pots of $40, to split them 50-50, allowing everyone to walk away with $20. But it’s a long way from the selfish and untrusting strategy to take the money and run.
Although many others have run trust game experiments with similar results, Zak’s contribution was to measure the level of oxytocin in the players’ brains while the experiment was going on. He found a “dramatic and direct” correlation between the level of the A players’ original donation, the change in the oxytocin levels in the brains of the B players, and the amount B players returned.
What this and other research suggest is that, “as a species, we are far less self-interested – and on balance, generally far kinder and more cooperative – than the prevailing wisdom has ever acknowledged.” Zak concluded. “The Golden Rule is a lesson the body already knows, and when we get it right, we feel the rewards immediately.
What we can take away from the work of Darwin and his successors is that our “moral sense” has evolved from millions of years of adaptive behavior, providing a useful restraint on equally powerful instincts that incline us toward selfishness, ruthless predation and immediate gratification. Because of this moral sensibility, we sympathize with those in need, and take pleasure in helping them. We are willing to trust others in the expectation that we will be trusted in return, and we feel warm and cuddly when they do. When they don’t, we are outraged and take pleasure in punishing them. We feel shame when we ourselves act too selfishly and sensibilities are now part of our physiological and emotional makeup. They are hardwired into our brains and our hearts.
“Our moral instincts evolved … to help us put Us ahead of Me,” writes Joshua Greene in his book Moral Tribes. Greene cautions, however, that we must be careful not to push the evolutionary basis of morality too far. While we are programmed for sympathy and cooperation, but they are not extended to everyone – only those in our family, our circle, our own tribe. “Universal cooperation is inconsistent with the principles governing evolution by natural selection,” Greene writes. In genetic terms, cooperation evolved not as a mechanism to promote universal peace and harmony, but more narrowly as a successful strategy for Us to beat Them.
But if that is true, then why do we routinely find selflessness, sympathy and cooperation with people who are different from ourselves? Why do we send pennies to starving babies in Biafra or take in desperate refugees from Syria? And why, if our moral instincts are universal and innate, do different societies adopt such different moral codes?
The answer is that while our moral instincts evolved on a genetic foundation, they require cultural and social institutions to actually refine and communicate the values, norms and practices – the dos and don’ts. Morality evolved through a combination of genetics and culture. To use a high-tech analogy, biology and evolution provide the operating software of moral sensibility, but it is culture that provides most of the apps.
It is this genetic and cultural coevolution that explains why homo sapiens prevailed over their stronger, brainier rivals, the Neanderthals, 30,000 years ago. And it is this coevolution that explains why we have been able to widen our lead over all other species in the years since. Physiologically, we have evolved very little from those early hunter-gatherers. But thanks to our unique ability to communicate stories and myths that, over time, provide the basis for social norms and intuitions, we have made dramatic progress in our ability to extend sympathy, altruism, trust and cooperation beyond our immediate circle to large numbers of people we do not know, and even to those with whom we sometimes compete.
Given the litany of modern-day lapses – from the Holocaust and the Rwandan genocide to the atrocities of radical Islam and the current scapegoating of immigrants – it would be ridiculous to claim that humans have evolved to the point that we now treat everyone as we would want to be treated. However, to the extent that we have succeeded in extending the Golden Rule to those unlike ourselves, we can thank religions, laws and cultures for carrying our moral instincts beyond the demands of biological survival, thereby allowing humans to achieve higher levels of cooperation than bees, ants, penguins and chimpanzees.
The human species that emerged from the jungles and the savannas was a stubbornly social animal, with instincts for both competition and cooperation. And for that reason, an economic system that is based on the presumption that people will, or should, act only on the basis of selfishness is no more likely to succeed than one based on the utopian presumption that people will, or should, act only on the basis of altruism. Both are based on a false understanding of human nature.
////// FORTSÄTT HÄR
/////// End of Quote from Pearlstein: Moral Capitalism
/////// Quoting Pearlstein: Moral Capitalism (2020, pp. 204-205):
One of my favorite political speeches – and one I play each year in my introductory economics class – was give by Robert Kennedy while he was running for president in that tragic spring of 1968. It was a speech about the gross national product, which measures the economy’s output and is often used as a proxy for a nation’s well-being. Kennedy’s point was that maybe it shouldn’t be.
Our Gross National Product, now, is over $800 billion a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our national wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts [the assassin's] rifle and [the murderer's] knife and the television programs which glorify violence in order to sell toys to our children.
And then he turned to the things it leaves out:
Yes the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.
What seems so striking about this speech today is not only its eloquence – when was the last time you heard a politician give a stump speech like that – but also the clarity of its moral vision.
/////// End of Quote from Pearlstein: Moral Capitalism