Saturday, January 17, 2015
Greed Is Not Good (Part 2)
Part 1 of this three-part series explored how we have misinterpreted Adam Smith and consequently enthroned the notion of self-interest as the central motor of capitalism. Part 2 will examine the opposite of self-interest—republican disinterest—and identify the true purpose of business.
Self-interest is very much a moral question, not just a value-neutral economic engine that is supposed to drive the mindless machinery of the free market. Indeed, self-interest is a very troubling moral question, for an economic system based on this principle creates almost irresistible incentives for people to behave in patently immoral ways.
Who would argue that we must be a moral people if self-government is to work? This is what some would call a no-brainer. The freer we are, the greater burden we as individual citizens must bear in creating a society of order and justice. Republicanism, succeeding monarchy as the dominant political system, “put an enormous burden on individuals,” says Gordon Wood. “They were expected to suppress their private wants and interests and develop disinterestedness—the term the eighteenth century most often used as a synonym for civic virtue. . . . Dr. Johnson defined disinterest as being ‘superior to regard of private advantage; not influenced by private profit.’ We today have lost most of this older meaning. Even some educated people now use ‘disinterested’ as a synonym for ‘uninterested,’ meaning indifferent or unconcerned.”1 Disinterest, however, is actually the exact opposite of self-interest.
“Republics,” Wood continues, “demanded far more morally from their citizens than monarchies did of their subjects. In monarchies each man’s desire to do what was right in his own eyes could be restrained by fear or force.” In republics, by contrast, the only effective restraint on self-interest is the sense among citizens that they must often sacrifice personal advantage for the public welfare. Today, among conservative Republicans, this attitude has been mislabeled “socialism.” It is indeed ironic that self-interest—the one force that Wood identifies as needing to be restrained if a republic is to hold itself together—is the only force that conventional economic theory proposes as a social adhesive. This is not only a highly illogical thesis; it is also a disturbingly immoral philosophy.
What we have in modern America, then, is a form of government that requires a disinterested citizenry and an economic system founded upon the principle of self-interest: a perfect mismatch. And, unfortunately, the economy has been in control for a long time now. To correct this problem, however, we cannot merely tell people to become disinterested. All the incentives in the present system encourage the exact opposite behavior. What we need is a fundamental change in the structure of the economy, so that our economic relationships actually encourage disinterested action. But we also need a higher ideal than self-interest to bind us together, for self-interest, even though it does cause us to “do business” with one another, also creates too many impediments to true economic and societal health.
The Purpose of Business
The escalating height and frequency of the hurdles corporate capitalism requires businesses to jump if they want to stay in business put immense pressure on them to increase their productivity and develop innovative new technologies. What this means, within a system that enshrines self-interest, is that companies must become increasingly and hostilely competitive. Their investors require ever-higher returns, and this creates a myopic focus on the short-term bottom line. Quarterly profits, not long-term excellence and service, determine company policy and culture. Especially in tough economic times, such as those we are just emerging from, this short-term focus creates incredible pressure on managers and employees alike to beat their competitors. In our mercenary marketplace, you either eat or get eaten. There is no leisure for focusing on such trivial matters as providing a service to society. The bottom line is everything.
I used to ask students in my operations management classes at the university what the purpose of a business is. I always asked this out of the blue, without any sort of preamble to bias their replies. And without exception, their first answer was always, “To make a profit.” Rarely, even when I dug a little deeper, did they bring up the radical notion that businesses exist to provide two things for society: a valuable good or service and employment opportunities. These were juniors and seniors in the business curriculum, and they had learned their lessons well. They were prepared for life in corporate America or, as they liked to call it, “the real world.”
I remember reading the account of one business consultant who asked a group of high-level executives the same question I asked my students. They too claimed their business existed to make a profit. This consultant then asked them about their drug and prostitution operations. The executives were aghast at the question. “I just assumed,” he answered, “if you were in business to make money, that you’d be involved in the most profitable kinds of business.” Shortly before 2008, he might have asked about their subprime mortgages and credit default swaps. Regardless, the executives suddenly had an “Aha!” experience. They realized their business activities were indeed restricted by deeper purposes that they had not even fathomed. And so it is with almost all companies. If investment banks had figured this out a decade or two ago, we could have avoided the mess we found ourselves facing in 2008.
The problem with this acute management myopia is that on the practical, everyday side of the ledger, the larger question of economics is ignored, thus focusing all the attention and resources of corporate America on the grand ideal of making a buck. The direct consequences of corporate America’s self-interest and misdirected energies are not trivial.
Because businesses and individuals are not knit together in our economy by a common purpose and an openly acknowledged concern for the greater good of society, but operate instead on the principles of self-interest and self-perpetuation, the competitive climate in America has become one of hostility and aggression and dishonesty rather than cooperation and fair play. It is economic Darwinism of the highest order—“survival of the fittest,” as Spencer phrased it.
Indeed, survival is what twenty-first-century corporate capitalism is all about, especially now, as our overall economic health gradually disintegrates. Survival—not service, not quality, not human development—is the driving force behind every element in the current system. And this is not surprising, for it is the system itself that has created this state of affairs. What we are experiencing are systemic dysfunctions.
Self-interest leads inexorably to competition, and competition leads eventually and inevitably to the mercenary mess we are now witnessing. But who ever really believed in unfettered competition in the first place? On the surface, conservatives and even some liberals claim to believe in it. Market triumphalism was all the rage not so very long ago. But did anyone really believe? The economic meltdown of 2008 was very effective at stripping away what we now see were mere dogmatic pretenses. Even Alan Greenspan had to admit that deregulation was a huge mistake (although Republicans, ever deficient in economic memory, are now betting their political future on this very mistaken notion).
In the past, conservatives could always point to communism to prove that unfettered competition was necessary in order to achieve quality, efficiency, and variety. But they were setting up a straw man, because communism never quite was the opposite of corporate capitalism. And unfettered competition never was what conservatives were really after.
All we have to do is look at AIG, Merrill Lynch, CitiBank, General Motors, and a host of other troubled companies. They never really wanted unfettered competition. What corporations have always wanted is “corporate socialism.” They have always lobbied for special benefits and tax breaks. And when things get really bad, they want a bailout because they consider themselves too important to die. They want to survive. Self-interest at its most visceral level.
Interestingly, however, unfettered competition does not lead to greater freedom; it leads to authoritarianism. The freely competitive market becomes less competitive over time, the inevitable result being an increase in inequality. David Korten explains that “a competitive market is competitive only when there are enough buyers and sellers that each has many alternatives. However, by its very nature, untempered competition creates winners and losers. Winners tend to grow in economic power while losers disappear. The bigger the winners, the more difficult it is for new entrants to gain a foothold. Market control tends to concentrate in a few firms, so that the conditions for competition are eroded.”2 In other words, unfettered competition is an unsustainable condition. So much for the mythical free market all conservatives and many liberals worship.
At least this is the case in an economy that enthrones endless growth and unlimited accumulation of capital. Even Adam Smith’s suboptimal society was based on the assumption of limited, universal ownership, where no individual was able to control so much property and power and wealth that he was able to take unfair advantage of others. The invisible hand metaphor never allowed for the accumulation of wealth and power that we see in corporations today. Smith would have been appalled at the inequality we have permitted in the name of free enterprise. He would point out that our free enterprise today may exist to some degree between businesses, but it does not exist between corporations and individual consumers, nor does it exist within corporations, those unashamed bastions of authoritarianism.
Of course, Smith never intended for us to create even a suboptimal society. He wanted us to embrace the moral quality he called sympathy, thus opening the door to a higher order of economic intercourse. He hoped for an optimal society, one that could produce economic health and prosperity for all. Stay tuned.
1. Gordon S. Wood, The Radicalism of the American Revolution (New York: Knopf, 1991), 104–5.
2. David C. Korten, “A Deeper Look at ‘Sustainable Development,’” World Business Academy Perspectives 6, no. 2: 26–27, adapted by Willis Harman from “Sustainable Development,” World Policy Journal, Winter 1991–1992.