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Tag: Chicago school of economics

Why unethical conduct in business is so common at this time in our history? Why is business ethics almost irrelevant?

 

076A2032Why unethical conduct in business is so common at this time in our history? Why is business ethics almost irrelevant?

It is now about four years since the catastrophe on Wall Street wrought destruction on this country’s economy. In those three years, the lives of much of the population have become much more difficult while the lives of those who created the disaster seem to have changed but little.

How did we get here? How did doing financial speculation amounting to little more than gambling become respectable? How did the idea of a responsibility to the other citizens of a nation become amusing to the elites?

There are several factors. The first was the advent of the baby boomers to power and authority replacing the Depression and the World War Two Generations. Probably the best date for this transfer would be 1976 when Jimmy Carter became President. He was the first President to not have served in the Second World War since Truman. The significance of this was huge. The previous generation had solid memories of the failures of financial sector and the long hard times that resulted. The difference between study and experience are dramatic. It’s even worse when it’s collective experience. The new generation had stories, movies and television to remind them of the pain of those years, but it didn’t carry the power of the emotions involved, the collective helplessness of more than fifteen years when everything that generation knew was in peril.

The second factor I point to is the advent of the Chicago School of Economics and the doctrines of Milton Friedman. I point in particular to Friedman’s 1970 article in the New York Times Magazine, The Social Responsibility of Business is to Increase its Profits. This is my favorite quote.

But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

I want you to understand that it appears to me that included in “the doctrine of social responsibility” is duty, honor, religion and patriotism, to name a few. (I like to tell my ethics class that the no religion agrees with this doctrine that doesn’t practice human sacrifice.) Here we have a rejection of those values that constitute Western Civilization. From Wikipedia:

The concept of western culture is generally linked to the classical definition of the Western world. In this definition, Western culture is the set of literary, scientific, political, artistic and philosophical principles which set it apart from other civilizations. Much of this set of traditions and knowledge is collected in the Western canon.

These things that make us human, these things that convey the values – the principles, that are the result of thousands of years of human experience are swept away in a simple doctrine that justifies any action within “the rules of the game.”

I want to point out one more thing: notice that the principles of “within the rules of the game” and “open and free competition without deception or fraud” are in many ways contradictory. If you can make or influence the rules why should you compete? Now get a load of this: Friedman tells businessmen that they are free of any restraint, every limitation of conduct, but they are supposed to hold to the duty of engaging in open and free competition without deception or fraud: Do whatever is necessary to make a profit but be good boys and compete.

The third element is the gradually increasing wave of deregulation which begins in a small way in 1971 when the Nixon Administration recommends the rail and trucking industries be deregulated. By the time, Jimmy Carter is elected the doctrine has gained enormous strength and much wider application. The basic implication that government regulation damages business success hampered any attempt at new regulation no matter what happened. This attitude is critical to what happens next.

The fourth element can be dated roughly as beginning 1981. Hostile takeovers and corporate raiding become regular parts of the business news. The basic significance of this is that it is a war. A war fought between manufacturing and finance, with manufacturing losing at every turn. The secondary effects were only a little less worse. You could make money at it. Not little money like people made from developing new products and making things, big money. T. Boone Pickens, one of the major corporate raiders of the period is worth three billion dollars and is rated currently as the 117th richest man in the world. Now let us add in a related development, the financing of these takeovers. Drexel Burnham Lambert paid Michael Milken 550 million dollars a year during its heyday. What did Michael Milken do to merit this: he created high yield bonds, junk bonds. The era of “financial innovation” begins here. Continuing to the present day, more and more bizarre mathematical creations will be used for investment, financing and speculation.

Now, let’s combine them. Those Americans familiar with the pain of the results pass on the reins of power to a new generation. The Chicago School of Economics will provide the philosophical basis for discarding societal responsibility. The government reacts with deregulation which makes it exceptionally difficult to re-regulate industries. The financial industry begins destroying manufacturing in its search for profits.

All the elements are now in place for what has happened and continues to happen. The American population without previous experience of the fruits of financial speculation have no common idea of what should be done. The ethic of the business world is converted from a complex set of factors motivated by religion, philosophy, the myriad other factors that tie us to one another as a people to one of profit as the only value. The government accepts this philosophy and applies it, making deregulation and not regulating pretty much the official doctrine of the government. The financial industry begins destroying healthy companies making hundreds of millions of dollars for what might kindly be described as little effort. The government does not intervene to stop this, which is a clear demarcation line in history that the power of that part of American that makes things is eclipsed by the power of the deal makers, the part of American society that moves money.

Out of this history we grew a generation of Americans who knew with certainty (and unfortunately with accuracy) that going into the financial industry, taking risks, and pushing the boundaries of the rules could make one a multi-millionaire in short order. The most capable of the students at the great universities many of them Ivy League schools went into finance. Those individuals were supposed to be a wide variety of things especially the keepers of the flame, the torch that is passed from one generation to another, the moral standards, the courage, the willingness to sacrifice for their country and their fellow man so that all can prosper. It is difficult to maintain a system of morals when the rewards are so extreme. My understanding is that ivy leaguers can start at a Wall Street firm for as much as $350,000 in salary. And after that if you are willing to do “what it takes,” the path to being a mere millionaire is quick and easy. These people were supposed to be crusading attorneys, publishers, politicians, administrators – all those things that make societies function. There is an ancient precept that nations succeed based on the wisdom of the learned, the courage of their soldiers and the efforts of the workers. Our best and brightest don’t go there. They go to make money in a moral vacuum.

We are going to pay for this for a long time. When the basic doctrine, the ethos of a country becomes devoted to the acquisition of wealth with not even a tiny lip service to virtue you get unethical conduct on a broad front across the business world. Everything that has happened since then, has grown out of these events that I described. The Savings and Loan Etc. (I was going to list them but you know as well as I do what they are and I find it too depressing to make such a list just at the moment) are all explainable out of these elements.

Now we have the demonstrations on Wall Street that are rapidly forming a counterpoint to the story,  I told above.

Is this the beginning of a brand new story or a small and insignificant chapter in the global rise of financialization?

I am hoping for a new story.

James Pilant

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Milton Friedman’s Dumbest Idea

Milton Friedman’s Dumbest Idea (The article actually says “the world’s dumbest idea,” but it is longer than the recommended length for titles if you are doing “search engine optimization and I had to cut it. jp)

I wish I had written the article below. I love every word of it, and the most astonishing thing about this writing is where it appears, in Forbes. That takes by breath away. How did he get past the editor?

Well, enough of that –

The article is very much what I have been saying in previous articles on this web site and in public, that is, the idea that a corporation’s sole purpose is to make money for the shareholder is ridiculous. I’d start my analysis with “non-profits,” and get more legally  critical as I went through the various kinds of corporations and what they were used for.

This is a quote of mine from 2010 –

http://pilantsbusinessethics.com/2010/07/27/american-business-ethical-collapse/

Generally speaking, articles dealing with the crisis focus on derivatives, Sallie Mae, the business press, rating agencies, etc. They all share blame and a lot of it. I have always been convinced that the underlying problem was greed, self interest, the corrosive effects of Milton Friedman’s bizarre doctrine of economic utopia, and the replacement of critical scrutiny by frantic cheerleading in the financial press, and I have some more villains to name.

Bogle doesn’t dodge the ethical question. He wonders how we got here and how we can get out. He longs for the day when businessmen understood the value of trust and fair dealing. I’m not surprised to find that Mr. Bogle has no simple solution. It took four decades of worship of the financial means of production of little more than electronic impulses to triumph over the creation of actual goods. This isn’t going to be easy, and it it likely to fail subjecting this country to a chain of financial meltdowns each one of which will severely damage the lives of millions of Americans who will bear the chief cost not only of their way of life but paying for the meltdown themselves out of their “widow’s mite.”

This is another from 7/25/2010.

http://pilantsbusinessethics.com/2010/07/25/wall-street-looked-the-other-way/

This is capitalism run off the tracks. Greed out weighed simple good judgment. Obvious signs of trouble, not just obvious but certain evidence of approaching disaster, were ignored as money piled up.

The market was supposed to be self regulating. Read a little Milton Friedman. This economic freedom to innovate was supposed to lead to better lives for all Americans, perhaps the whole world. This utopia, this nirvana, has thus far failed to appear. But incomes in a handful of the well placed are measured in the billions.

And another from 12/20/2009.

http://pilantsbusinessethics.com/2009/12/20/are-businessmen-morally-older-than-ten/another,

Now, you could make a good argument that this kind of business thought (Milton Friedman, etc) actually falls into the second level where self interest and avoidance of punishment become primary concerns.  However, making moral decisions at the second level of Kohlberg’s six stages is just about as insulting as reasoning at the first.

My second point is when business is considered only as a money making endeavor, all the other levels of moral development don’t just become irrelevant, they become a block and a hazard to making maximum profit.

If you are short on time, please read the brief excerpt below, but if you have time click on the link and read the whole article. It merits it.

James Pilant

http://www.forbes.com/sites/stevedenning/2013/06/26/the-origin-of-the-worlds-dumbest-idea-milton-friedman/

No popular idea ever has a single origin. But the idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman in the New York Times on September 13, 1970.

As the leader of the Chicago school of economics, and the winner of Nobel Prize in Economics in 1976, Friedman has been described by The Economist as “the most influential economist of the second half of the 20th century…possibly of all of it”. The impact of the NYT article contributed to George Will calling him “the most consequential public intellectual of the 20th century.”

Friedman’s article was ferocious. Any business executives who pursued a goal other than making money were, he said, “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor.” They had even turned themselves into “unelected government officials” who were illegally taxing employers and customers.

How did the Nobel-prize winner arrive at these conclusions? It’s curious that a paper which accuses others of “analytical looseness and lack of rigor” assumes its conclusion before it begins. “In a free-enterprise, private-property sys­tem,” the article states flatly at the outset as an obvious truth requiring no justification or proof, “a corporate executive is an employee of the owners of the business,” namely the shareholders.

Come again?

If anyone familiar with even the rudiments of the law were to be asked whether a corporate executive is an employee of the shareholders, the answer would be: clearly not. The executive is an employee of the corporation.

From around the web.

From the web site, Brad DeLong.

http://delong.typepad.com/sdj/2011/10/milton-friedmans-magical-thinking-dani-rodrik-project-syndicate.html

But Friedman also produced a less felicitous legacy. In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state. In effect, he presented government as the enemy of the market. He therefore blinded us to the evident reality that all successful economies are, in fact, mixed. Unfortunately, the world economy is still contending with that blindness in the aftermath of a financial crisis that resulted, in no small part, from letting financial markets run too free.

The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic. In fact, the kind of markets that modern economies need are not self-creating, self-regulating, self-stabilizing, or self-legitimizing. Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance.

From the web site, Reflection to Transformation.

http://theachiever2011.wordpress.com/2011/04/25/shareholder-value-is-the-dumbest-idea-in-the-world/

The birth of the shareholder value movement is commonly traced to a speech Jack Welch gave at New York’s Pierre hotel in 1981, shortly after taking the helm at GE.  In that famous speech, entitled “Growing Fast in a Slow-Growth Economy,” Jack Welch outlined his beliefs in selling underperforming businesses and aggressively cutting costs in order to deliver consistent profit rises that would outstrip global economic growth.  He told analysts then, “GE will be the locomotive pulling the GNP, not the caboose following it…,” according to reports of the speech.

Jack Welch said in the interview given on 11-March-2009 that he never meant to suggest that setting, and meeting, profit expectations quarter after quarter in an effort to boost a company’s share price should be the main goal of corporate executives.

“It is a dumb idea,” he said. “The idea that shareholder value is a strategy is insane. It is the product of your combined efforts – from the management to the employees”.

What he was talking about is the commonly held belief that the purpose of business is to increase shareholder value. That belief is variously attributed to Milton Friedman, Adam Smith, and perhaps common sense.  BUT, it was the operating principle that resulted in two market busts and innumerous scandals in the past decade. The fact that Welch was one of the main proponents certainly adds a fair amount of gravitas to his comments.

Profitability, shareholder value, and measures like economic value added (EVA) completely miss a point that Welch articulated so well. Namely, increased “shareholder value” is a result, not a strategy.

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My response to Andi’s Questions

Andi concluded his comments on my last post by asking me these questions, which I will now try to answer.

Whether protests are morally right or wrong, is difficult. What do you think about the following questions?:

Can a protest really influence decisions that there are fair outcomes for everybody? Or is it only a way to highlight unfair procedures?

I have no utopian vision of a world where everyone has a just outcome. It’s not going to happen. Life is messy and many things unfair. However, governments and economies are man made creations and there is no natural law governing them only numerical limitations, so if outcomes are produced by men those outcomes can be changed by men.

Income inequality only reached this level over many years and as a result of many changes both international and purely domestic. So, what can be changed in one direction can be moved into another.

Change is possible.

Now, can the protestors generate any change in the philosophy of the marketplace. Yes,

Over the last 150 years two basic philosophies have run through American Business. The first set is based on Christianity. It’s most pure economic form is the Social Gospel. This continues to the modern day with parallel visions like Marxism which is essentially an economic religion.

The second set is Social Darwinism. Herbert Spencer will be its prophet and it may very well have culminated philosophically with Milton Friedman. Edmund Spencer took the survival of the fittest concept from Darwin. Milton Friedman added Darwin’s concept of natural selection, that is, the process of evolution must not be interfered with to favor the weak.

These have fluctuated in power and influence. Currently, the debate leans very heavily in the direction of free market fundamentalism, the Chicago School of Economics.

What effect can the Wall Street Protests have?

First, they shift the discussion. For most of the previous year, the public was assailed with tales of the dangers of deficit spending, a discussion focus of the American beltway elites but a subject with precious little importance to the great mass of Americans.

Second, it makes the wealthy and the beltway elites uncomfortable. The disdain and over reactions from the right wing media are palpable. You have to understand that in this country, the wealthy are insulated from virtually any criticism. Over the last forty years wealth has become a sign of virtue in many circles. They live in world where the media idealizes them, where the government is an ally which takes their needs seriously and where the lower classes are discussed as overpaid, lazy, fat and lacking initiative. To hear a contrary dialogue is to them astonishing. Let them be astonished.

Third, and most critical, the movement is laying the groundwork for groups of citizens to follow, a template for action. This means that in the future when there is a policy placed before the public, these groups spawned by this political action will be able to present alternatives or start initiatives of their own. Policy battles that have been one-sides will become disputes where more than one point of view is heard.

James Pilant

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Is a New Movement in American Politics Being Born?

I have been thinking about whether or not the Wall Street Protests now spreading nation wide are the beginning of a significant turning point in American history.

I believe the answer is “probably.” I would prefer a ringing “Yes, this is it!” but after the Obama campaign of 2008, I have lost faith in what are supposed to historical turning points. In that case, we elected a leader who promised real change but who turned out to be a pitiful caricature of his promises. I remember reading Will Durant, an essay he wrote after he felt the disappointment of Woodrow Wilson’s Administration. The Progressives, Durant among them, came out and fought for Wilson’s election only to find he had only limited use for them and their policies. He wrote that you can’t place dependence on any one man when you are part of a political movement. I forgot that lesson of history during the 2008 election. I promise I will not be so foolish again.

But this new movement has several things going for it. One is timing. The United States is suffering under a recession which is highly likely to turn into a full scale depression with the big D. The people of this country who are witnessing the day to day collapse of small businesses, they personally out of work or having direct knowledge of their friends and family out of work are not beguiled by the word of record corporate profits. That money does not flow to them and they are well aware of it. (You are aware the bottom 50% of the citizens of our great democracy have 2.5% of the wealth?)

My local paper is replete with stories of how the real estate market has turned or will turn around – all this while a rational person watches housing prices continue to fall. The local real estate captive paper is more useful for training a dog than as a provider of useful information.

Another thing the movement has going for it is the ability to use the new media effectively. I use a desktop computer and that is the end of my desire for electronics. I don’t want to be communicated with all the time. I like my privacy. But these individuals are quite clever with these new devices using them in a manner more advanced than those who advocated change this Spring in the Middle East and China. They have an amazing web presence.

My third and last reason for the movement’s likely success is the international political climate. The neoliberals of the Chicago School of Economics have been driven from South America and their policies found to be the height of madness and lunacy in Ireland and Iceland. The great philosophical adventure of free market absolutism is dying although I am well aware this beast of prey still has teeth to harm the middle class and poor. Their corporate support is unabated and the money they continue to receive from the looney billionaires who feel oppressed will continue. But being repudiated in much of the world is going to cause the movement many problems most of them long term.

So, I have some hope and a little faith. This may be a turning point in American politics.

James Pilant

Sara Kenigsberg writing in the Huffington Post has a new article:

Occupy Wall Street Protests Ignite Progressive Political Fire In Washington

Leaders at the conference also pressed progressives to focus their energy beyond Obama, highlighting broad dissatisfaction with an administration that has repeatedly derided liberals, dismissing many of the activists present at the conference as “the professional left.” The message from progressive leaders — who included Jones, economist Robert Reich and The Nation publisher Katrina vanden Heuvel, among others — was clear: Neither political party in Washington is listening to working Americans struggling through the worst recession since the Great Depression. Progressives will have to continue hosting events like Occupy Wall Street that bring voters into the streets and pressure political leaders to take action on the jobs crisis. Progressive members of Congress have already taken note, with the Progressive Caucus — the largest alliance of House liberals — endorsing Occupy Wall Street amid the conference cheerleading.

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