Pilant's Business Ethics

Business Ethics Blog

Tag: Economic

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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Catherine Crier Attacks Conservative Dogma About Adam Smith

Adam Smith; engraving

Image via Wikipedia

In an article in Huffington Post, Catherine Crier finds the Tea Party and Conservative view of Adam Smith and his doctrines to be ridiculous. In her interpretation (and mine), Adam Smith was at one with the principles of the mixed economy, that is, some regulation and some economic freedom. Here’s two key paragraphs –

Just as Jeffersonian democracy operates best on a small scale, Adam Smith believed his self-correcting free markets were ideal for small businesses in a domestic economy. Integrated in their communities, these businesses would be influenced directly by the needs and demands of consumers, and any dangerous or abusive conduct would rarely affect the broader economy. But Smith treated large, powerful companies very differently. He said big business was led by “an order of men…that generally have an interest to deceive and even to oppress the public”, and he referred to powerful corporations (then known as joint stock companies) as “unaccountable sovereigns” that were as dangerous to free markets as tyrannical governments. Unrestrained, they had the power to shape society and governments for their own purposes, and consumers would pay for “all the extraordinary profits” while suffering from “all the extraordinary waste”, the inherent fraud and abuse, that accompanies such immense economic power.

Smith stated emphatically that a strong government, acting through democratic and legal institutions, was the only entity capable of challenging such corporate power. Smith supported necessary government regulations, labor and human rights, public education, and progressive taxation to ease the economic and social inequities he knew would occur in a capitalist system. Without these “liberal” measures, social and political unrest would threaten a nation’s stability and his free market economy could not survive.

I have often been surprised what conservative say writers mean and what I read when I study the same text. She appears to have had the same experience. Few individuals read the Great Works of the Western World with any focus. The material is difficult and often lengthy as well but the Great Books are worth the effort.

I have long been a fan of Robert Maynard Hutchins and his belief in the importance of books and skilled reading. I have read almost a third of the books he lists at the end of his book, “How to Read a Book.” Let’s have more reading and understanding and less dogma.

James Pilant

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Paul Krugman Makes Some Good Points

Paul Krugman’s speech called The Profession and the Crisis has some interesting remarks. I certainly enjoyed it. It can be found in its entirety in the Eastern Economic Journal. Here’s his introduction –

So we’re having an economic crisis. I say “having,” not “had,” because we have by no means recovered. Financial panic may have subsided, stocks may be up, but employment remains far below pre-crisis levels, and unemployment — especially long-term unemployment — remains disastrously high. And while you can make the case that the economy is slowly on the mend, slowly is the operative word. We have already been through two years of economic purgatory, and there’s no end in sight.

There is a real sense in which times like these are what economists are for, just as wars are what career military officers are for. OK, maybe I can let microeconomists off the hook. But macroeconomics is, above all, about understanding and preventing or at least mitigating economic downturns. This crisis was the time for the economics profession to justify its existence, for us academic scribblers to show what all our models and analysis are good for.

We have not, to put it mildly, delivered.

Yes, exactly. The modern profession of economics failed repeatedly in the crisis of the last few years. Where was the profession during the Bush tax cuts? How did the housing bubble seem to so many as a sustainable healthy growth (I had it identified as a bubble certainly by 2004.)? How could economists have believed that the American financial system was “self-regulating?” I can go on for some time.

All this reminds me of a joke from the days of the Soviet Union. Leonid Brezhnev, the General Secretary of the Communist Part, is reviewing the May Day parade with it huge lines of tanks, missile launchers and other displays of power, when in the middle of all this array, appears a truck with eight shabbily dressed me standing in the back. An observer standing with Brezhnev asks who they might be. He replies, “Those are economists.” The observer asks, “Why are they with the tanks and the missile launchers?” Brezhnev turns to his visitor and in surprise asks, “Do you know how much damage eight economists can do?”

The doctrines of free trade and the unlimited free market as the best determinant of economic outcomes have been devastating wrecking balls in our society destroying the Middle Class and stacking enormous amounts of money for the benefit of players in a financial system devoted to little more than speculation. Keynes once famously said that in the long run we are all dead. He didn’t mean for the economists to kill us

But economics has fallen behind the curve discarding as useless the wisdom of the past because of its capture by the business interests and the rampant self interests of the Chicago School, the modern symbol example of intellectual hubris.

Here’s Paul Krugman again –

In short, in responding to the crisis, the profession presented a sorry spectacle of unnecessary ignorance that didn’t even recognize itself as ignorance, of bitter debate over issues that were resolved many decades earlier. And all of this, of course, made the profession mostly useless at a time when it could and should have been of great service. Put it this way: we would have responded better to this crisis if macroeconomics had been frozen at the level of knowledge it had in 1948, when Paul Samuelson published the first edition of his famous textbook. And the result has been to leave actual policy discussion without any discipline from the people who should be shaping that discussion: politicians and officials have been free to follow their prejudices and intuitions, never mind the lessons of history and analysis. Economists have failed to fulfill their social function.

He’s right. The great mass of the profession is useless or counterproductive shrilly shouting the doctrines that three short years ago almost brought the world financial system to ruin. They shout like some unrepentant Communists that their doctrines were not followed with purity, that if they had we would be living in a financial utopia. Well, I don’t believe those promises and neither should you.

For the time being the profession of economics is a confusion of voices many deliberately purchased by the great financial interests. So, we individuals need to go back and read Keynes and study the rest of the great economists because the current profession is in love with complex models, being published and getting a ton of grant money from a financial industry that uses them as little more than trained poodles. (If you don’t belive me go watch Inside Job.)

James Pilant

Andrew Comments on the Post – The TARP Bank Bailout Saved Huge Financial Institutions But the Benefits Failed to Trickle Down to Most Americans

Andrew comments on my previous post – The TARP Bank Bailout Saved Huge Financial Institutions But the Benefits Failed to Trickle Down to Most Americans.

Andrew comments with some regularlity on my posts. Here are his latest thoughts –

You mean trickle down economics doesnt actually work!?  Who would’ve thought it!!!!????  That type of economic mechanism only works when the business leaders allow it to happen.  In this case, greed led these executives to run their companies into the ground.  In response, the government bailed them out with a program that could only be effective if they behaved unselfishly and without greed.  Hmm…

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