Maxine Udall has a great post about Adam Smith and his belief in societal progress based on ethics. Here’s an excerpt:
Smith viewed society as progressing to greater “opulence” and more virtue. However, he recognized that moral sentiments are shaped by a society’s practices…[individuals] will over time shape norms and institutions, which in turn will cause moral sentiments to progress.
Or regress.
It is when I come to this part of Smith that the 18th century no longer brings comfort to me. I find myself asking…How does failure to hold investment bankers and rating agencies accountable affect the hard-wired sense of fairness and the moral sentiment of resentment that many of us feel? If BP is not held accountable, how will that trickle down and shape the moral sentiments of the citizenry? Will our inner impartial moral arbiter waiver as we confront decisions about how we should act toward our neighbor, our community, and our nation?
Adam Smith believed humanity (or at least England) was progressing in wealth and in ethics. To date, we have all tended to focus on the financial aspects of these crises in corporate judgment and management. I’m pretty sure Adam Smith would also have noticed that the potential for moral hazard extends far beyond the relatively unscathed main players. There will almost certainly be a moral trickle down that corrupts production and exchange at all levels of our society. An advanced, technologically complex nation that cannot or will not achieve the basics of accountability and restitution (aka justice) with financial and corporate entities that have harmed its citizenry deeply and lastingly is (I very much fear) evidence of the beginnings of a failed state. That the failure will be economic and moral, as well as political, is probably no coincidence.
Smith was likely thinking “in the long run” rather than incrementally in a straight line. Generally speaking, I think his position is largely correct. The world is getting wealthier and gradually fairer.
I wouldn’t rush to judgment on the present kerfuffle just yet. The game is far from over, and in the end, I think that what is unsustainable won’t continue forever. A wave seems strongest when it is cresting, just before it breaks.
Contradictory positions call forth their negation, and lack of accountability is self-contradictory in a free market system because it creates an incentive for cheating, which undermines the free market system itself. So there will be either reform or else systemic breakdown.
However, the real issue here is capture of the apparatus of the state by corporate interests. That leads to a state of affairs that is difficult to correct, short of a populist revolution or general breakdown. This and similar issues are discussed at Bill Mitchell’s in his post, The OECDs perverted view of fiscal policy, and comments.
Do you believe there a universal ethic?
Is it moral that women must cover themselves from head to toe, while men are not so constrained? Or that women cannot vote, or that decisions for the masses are made by an unelected few?
Is it moral that some people have more wealth than others? That some live in bigger houses? That teachers are paid less than basketball players? That people receive college scholarships on the basis of race, assets, athleticism, intellegence or any other accident of birth?
Is it moral that some people pay more taxes than others, for the same government benefits? Or that taxes are levied on some forms of income but not on others?
Is killing ever moral? Is using harsh methods to prevent killing moral? Is gambling moral? Abortion? Arizona’s alien laws? Are some prisons more moral than others? Life terms for 18-year olds? 14 year olds?
Is Democracy, where a majority rules, moral? Theocracy? Is the atom bomb moral? Is a pistol?
In short, the notion of some underlying morality and fairness is wrong. Can we really say the world is fairer, when Hitler, Pearl Harbor, Hiroshima, 9/11 and suicide bombing are so recent?
Philosophical discussions are fun and never conclusive, but do not believe they get you closer to an answer to economic questions.
By the way, I got a chuckle out of this sentence: “I think that what is unsustainable won’t continue forever.” Who would have thought?
Rodger Malcolm Mitchell
Redger: the notion of some underlying morality and fairness is wrong.
Tell that to monkeys. Research reveals that they have an underlying notion of fairness. Maybe humans moved beyond that “primitive” stage and canned it as non-adaptive?
Thanks Tom,
Then perhaps monkeys will answer the questions in my comment.
I’m no philosopher, but I don’t think Smith’s arguments rely on a universal ethic in that sense. What Maxine was saying is that (and this is still a philosophical question) we can make ethical comparisons, and we’ve regressed in terms of our ethics, breaking a line of seeming progress. I don’t know if that’s true, but we don’t need a universal ethic to make these arguments.
Economic questions are settled in the political space, and the political space involves complex interactions guided by (at least for some) ethical judgments, so we can’t ignore this issue.
Maxine’s statement does rely on a universal ethic. She feels, for instance, BP should be “held accountable.” She expects us all to feel the same.
But, what is BP? It’s mostly innocent people. A huge number of innocent employees. A huge number of innocent shareholders. A huge number of innocent suppliers. A huge number of innocent oil users. In some ways, it’s you and me.
Which of those innocent people should be “held accountable”? What if holding BP “accountable” means innocent people will be fired, or innocent suppliers will be put out of business, or all of us will have to pay more for our oil and gas, or all of us who hold BP stock, either directly or as part of a fund, will lose? Is that fair?
Maxine may express her emotional response, just as Obama and his Congress now are doing, but that’s not economics. Economics answers the question, who must pay a penalty for BP’s actions, how much and why?
Rodger Malcolm Mitchell
Fair points.
I’d argue that the way to bridge the gap between accountability and the reality of innocent people is to restructure the legal status of corporations, but I don’t know what that would look like. You’re right, though- there is an economic rationale, such that future corporations internalize potential punishment liabilities.
And yes, the oil is on the hands of everyone who consumes it in this case, including you and me.
1. Identify the culpable individuals, private and government
2. Punish them with firing, fines and jail
3. Federal government pay for all damages and repairs.
Rodger Malcolm Mitchell
So I guess socialized risk is of no matter to you?
You mean like FDIC? Medicare? That kind of thing?
Rodger Malcolm Mitchell
Yes, but it’s all a matter of which direction the externality goes.
Socializing externality is a subsidy and subsidies involve inefficiency and dead weight loss.
Oh, and since when is accountability for imprudent risk-taking not applicable to free market capitalism. I was under the mistaken impression that risk and accountability were fundamental. Silly me.
BTW, it’s not just monkeys: Adam Smith, The Theory of Moral Sentiments summary.
It all depends on what makes you happy.
If it’s to punish as many people as possible — BP’s employees, suppliers’ employees, shareholders and all of us with higher prices for every product associated with oil — then pummel BP with everything you’ve got. Hey, drive them out of business if that satisfies your blood lust.
However, if you’d rather do what’s best for America, you’ll forget about retribution, punish only those individuals who actually were responsible, and have the government pick up the tab as a further stimulus for our economy.
Rodger Malcolm Mitchell
Rodger, I beg to disagree on two counts:
1. It’s not going to be possible to hold individuals accountable. That’s just not the way the system works in the US. If any individuals are scapegoated it will be low-level ones. While the US attorney general is talking a good game, I’ll believe it when I see it. I mean, after all, regulators at the Interior Department were caught doing drugs and literally in bed with lobbyists, and no one has been even fired, let alone prosecuted.
2. Free market capitalism, like any cultural institution, is rule-based. Fundamental to these rules is strict accountability for poor decision-making involving risk-taking, etc. The penalty is financial loss.
Having a double-standard for those to big to fail because they are well connected and everyone else is a sure way to undermine the system. It leads to corporate statism, the mirror opposite of socialistic statism, but a tyranny of the elite nevertheless.
1. I don’t agree we can’t hold individuals accountable. People are held accountable all the time. That’s what lawsuits and criminal prosecutions are for. Business people pay fines and go to jail every day. If the law isn’t working, change the law.
Your proposal is: Rather than trying to punish the guilty, let’s punish a few million people, and assume there are some guilty among them.
I once saw a movie in which one character said, “Just shoot everyone, and we’ll sort things out later.” That seems to be your philosophy.
2. BP is a corporation — a legal construct. It doesn’t exist in physical form. It merely is a piece of paper with words printed on it. You can’t punish BP. Trying to punish BP is like trying to punish a book.
You can however, punish people. So the question is, which people to punish. I suggest we try to be selective. I also suggest we be practical and do what is best for America, not what’s best for some notion of vengeance.
Rodger Malcolm Mitchell
Ralph, to date, the record of individuals being prosecuted for wrong-doing in the US for legal transgressions leading to the GFC is zero. I have zero faith in the government regarding this. Maybe its’ different elsewhere, but the US is completely compromised (corrupt).
And yes, BP is a corporation. It is legally responsible for damages, even if it puts them into bankruptcy. That’s how free markets and civil law works. The only thing that can prevent this is government inaction (disregard) or intervention (bailout). Investors and creditors should have known that they were dealing with a high risk enterprise and planned accordingly.
Rodger, I am sorry. I was just engaged in a conversation with a “Ralph” and mistyped your name. My apologies.
Tom, does the name Madoff ring any bells? Anyway, don’t you find the notion repugnant that the innocent should be punished because many guilty are not prosecuted?
You call BP, one of the world’s most profitable companies for almost 100 years, a “high risk enterprise”? It is clear you neither are an investor nor have been in business.
And of course you forget about innocent BP employees and innocent people whose pension plans invested in BP.
Finally, you forget about the cost of oil, which affects our entire economy and all of us.
And why all this forgetting? Is it simply vengeance or fear of federal deficits? I want to know where you’re coming from.
Madoff actually had nothing material to do with the lead up t the GFC. He got caught out by it. I am talking about the loan procedures that provided the fodder for the dodgy securitization that was then ratified by complicit ratings agencies. Willaim K. Black, Frank Partnoy, Janet Tavakoli, Elliot Spitzer and others document this criminal conspiracy that Black has named “control fraud,” CEO’s of major firms using their firms for criminal activities. High government official were also involved in calling off regulators and then participating in a cover up that amounts to obstruction of justice.
Rodger, I was market trader in my youth, and, yes, I have been involved is business as a principal. I would not touch the markets with a ten foot pole today, and small business is essentially shut out in the US.
Where am I coming from? I think that the free market system is under attack by top executives of large corporations that Simon Johnson, former chief economist for the IMF, has called “oligarchs.” They have effectively captured the apparatus of the state and do as they please, not only without fear of retribution but also able to demand that their losses be socialized. This is poisonous for the free market and democracy in the US.
I retired from 45 years as the owner of four very successful small businesses. I don’t recall being shut out of anything. You and Simon Johnson may think this “oligarchy” stuff is new and dangerous, perhaps because you have no memory of the past.
We used to have railroad barons, oil barons, cotton barons, auto barons, cattle barons, children and women in sweatshops, no minimum wage and, like today, all politicians were bought and paid for. Don’t get all in a lather about it. Things move in cycles and actually are far better today than in years past.
Still, we have drifted a bit from the central topic: Why would you prefer to punish millions of innocents, just because not enough guilty are punished? I always thought the American way was to prefer that 100 guilty go free rather than one innocent be punished.
And why would you prefer to punish people than to stimulate the economy?
Rodger Malcolm Mitchell
Rodger, it’s not about “punishing innocents.” When companies go under people lose their work. They have to look for other work if the company is not restructured. That’s just a fact of life. That’s the way it is for small companies’ why should it be different for big ones?
Creditor become equity holders of what left after settlement, and investors who accepted risks they should have anticipated get the fair market return, which in such a case is nothing. Where are the innocents being punished?
The fact is that should BP be put into bankruptcy, it will either be restructured, or else bought out. That’s the way free market capitalism works.
The innocents who won’t get punished are the people who lost their livelihoods in the Gulf, and the Americans who will get at least some of their country back after as much of the oil is cleaned up as possible.
Millions of people are not going to get hurt by BP’s bankruptcy, should that happen. Millions of Americans are presently being hurt by BP’s negligence, perhaps criminal, and eleven US citizens people are dead.
If Cameron wants to bailout BP, he is welcome too. Just don’t expect America to. There is no appetite for that, and if Obama tries, he is going to get creamed for it. People here are already enraged over the government complicity in this, and failure to act decisively now.
If I should excited about this, I am. This is a national outrage, and most people are extremely upset at BP, the US government, and now the UK government and unsympathetic Brits as well.
I’ll throw in Chris Hayes’ latest on the issue, which revolves around the idea of a social contract. Rodger, I’m guessing you’ll disagree…
http://www.thenation.com/article/bp-beyond-punishment
I’m all for punishment. However, I happen to disagree with the Supreme Court that said, in effect, a corporation is a person (in this case, with freedom-of-speech rights).
What seems to have been forgotten is the fact that a corporation is not a person. A corporation is no more capable of making moral, ethical or legal decisions than is a roll of toilet paper. A corporation is nothing more than a law. You can’t punish a roll of paper, a law or a corporation.
The moral, ethical and legal decisions are made by people, and it is people who should be rewarded and punished, depending on circumstance.
Tom, and to some degree Chris, say in effect, “Someone needs to be punished. But we don’t seem to be able to punish the guilty parties, so instead let’s just punish everyone, innocent and guilty alike.”
The fact that the innocent outnumber the guilty by several magnitudes doesn’t concern them. Also, what doesn’t concern them is the probability that the truly guilty — the top executives — will not be punished anyway.
And not even part of their consideration is what is best for America. Federal deficit spending is a stimulus. BP fines are not. This morning I saw on TV, oil-ruined beaches in Alabama. They should be cleaned.
The unemployment rate in America approaches 10%. How about the government hiring a half million people to start cleaning the beaches, just as it hired people to take the census. This is something the government can and should do, rather than crowing about how they’re going to hold BP “accountable.”
Vengeance might feel good for the moment, and it might get votes, but it will hurt millions of people and help no one.
Rodger Malcolm Mitchell
The problem is that our supreme court and lawmakers do treat corporations as such, and there’s no sign of that changing any time soon. Given that, most feel that they need to be held accountable, lest they be seen as above the law.
Corporations don’t vote, go to jail, catch the flu or sit in the back of the bus. They aren’t people, despite what our esteemed Justices Scalia and Thomas may believe, although conservatives may feel corporations are better than people.
As for “most feel,” I’ve spent the past 15 years battling reality vs. “most feel.” Hello, debt hawks.
So rather than risk bad “feelings” about corporations, it’s better to destroy the lives and fortunes of thousands or even millions of people?
It boils down to this: Government pays = people benefit. BP pays = people pay. Take your pick.
Rodger Malcolm Mitchell