Balancing economic morals

Thoughts about our continual navigation between the extremes of socialism and capitalism

The further we get into our current economic mess, the clearer its connections to psychology and morality become. Trust is the coin of the realm, and if trust breaks down, nothing can paper it over. With respect to this week's storm over the AIG bonuses, is the trust represented by written contracts sacrosanct, however corruptly arrived at, or is the more important trust that among citizens- that they treat each other fairly and take a measure of responsibility for their actions?

Taking a longer view, a persistent tension exists between idealistic economic morals, represented by family-related concepts, communitarianism, socialism, communism, and realistic, competitive economic morals, represented by Darwinian competition and capitalism. We are experiencing a deep shift from several decades celebrating the second (with the active support of religious conservatives, who so readily jettisoned communitarianism they supposedly valued) to the first, via the ascendence of Democrats, and the realization that we had gone too far towards free (and chaotic) markets.

On the one hand, communitarian values accord with a great deal of human nature, since we can be peaceful, loving, and caring to the point of altruism. We want to be loved, not only for what we do, but for simply being. Christianity claims to stand for love, even of enemies, whatever its actual history records. (Check this for a fascinating look at the business of morals.) The communist ideal spoke most definitively to this ideal in economic terms, saying that we could indeed have our cake and eat it too- give freely according to our capacity and get according to our needs. No wonder communist regimes were atheistic- they were poaching on the same utopian turf as Christianity.

As we know, such idealism is insufficient to run a real economy, and the alternate morality of competition, realism, and capitalism has carried the day. This also accords with human nature (not to mention game theory more generally), since we are competitive at the same time as we are loving, and no amount of ideology can wish that nature away. Even if 90% of humans were totally altruistic, the other 10% could mess things up royally in an idealistic economy. Beyond our internally divided natures, the structure of society also conspires to promote competitive morals, since there is always inequality of talent and resources, leading to inequality of returns, whose owners will, by nature, usually be in favor of further inequality.

The rich have the money to make more money by the magic of capitalism, and they also have the resources to play the political system to best advantage. Historically, they have, as a rule, authored the political system outright, in the forms of oligarchies, kingships, and so forth. Our own enlightened system, for all its ideals, was authored by the most well-to-do specimens of the age, and reflected that dominance in many ways (such as the perpetuation of slavery). Thus by both economic and political means, capitalism inexorably creates economic inequality by a rich-getting-richer and the poor-getting-poorer ratchet effect, just as biology observes that organisms inherit and achieve inquality in their struggle for existence and propagation.

Even in Darwinian terms, however, systems are not all one or the other- cooperation coexists with competition. The greatest strides in evolution (the union of cells to form eukaryotes, and the collaboration of cells to form multicellular organisms) were instances of cooperation in a sea of brutal competition. The question for us is how to balance idealism and realism, using the conscious levers of politics to ameliorate the natural workings of capitalism.

From the early history of Rome through the French revolution and on to today, societies grapple with this problem, trying to stave off chaos and revolt in reponse to gross inequality either through more effective oppression by those who have (Sparta, Soviet Russia), or by creating egalitarian processes to counteract the ratchet effect of competitive economics, hoping to buy off, co-opt, or even truly integrate the have-nots and have-less's.

The legitimacy of the political system hangs in the balance too, since while some inequality is inevitable, and quite a bit can be sanctioned by religious fiat, traditions of nobility, and the like, it seems ultimately impossible for humans to see bitter economic hardship and opulent luxury side by side without coming to the conclusion that something needs to change, often radically. We are too idealistic for that, as are, incidentally, monkeys as well.

In pre-history, intensely competitive tribes and city-states didn't bother with even the rhetoric of egalitarianism, killing each other to gain land, goods, and trade. The rich killed the poor. In antiquity, richer cultures developed the innovation of enslaving the poor- an advance, considering the alternative. This was the accepted reality of Greece and Rome.

But it was an unstable system, since after a few generations, slaves captured from far-away battles became full participants in the culture, with claims of native citizens, in practice if not in name. A novel egalitarian ethic was certainly one attraction of the nascent Christian movement in Imperial Rome, though in the beginning it attracted the upper crust and especially women, not slaves themselves, and Christianity ended up being quite compatible with slavery in the early US and elsewhere. In the middle ages slavery was transformed into feudal serfdom, as the Roman state broke down, centralization was lost, and new economic conditions gave a modicum of power to the lower classes, especially after bouts of the plague.

Skipping ahead to the French revolution, again the economic system was a shambles of vast inequality, and the new breath of enlightenment, given vibrant reality by the American experiment, rudely pulled away the veil of false consciousness- of the superiority of the nobility, of the inerrancy of the clergy, of the divinity of the King. The peasantry was fed up and ready to take its place at the table which it had laid. Thereafter, European societies fitfully moved towards increasingly egalitarian economic systems, exemplified by the Scandanavian countries of today. The process has been a political one of regulating and counter-acting the natural workings of the capitalist system to soften its Darwinian destructiveness and spread its wealth, while preserving its intrinsically productive aspects.

Where are we in the US on this scale? We have had our own brushes with slavery, serfdom, and peasantry in a dizzyingly dynamic and condensed history. While there are plenty of rags-to-riches stories of those who have parlayed their labor and smarts into wealth, our system remains classic in its tendency to reward capital and connections, and to tax labor and consumption. This process led to the huge inequities of the gilded age, which were then addressed by the legislated expedients of anti-trust, trade unionism, the estate tax, and the progressive income tax.

It is a commonplace that we are in another guilded age, after each of the above expedients were weakened in the last decades of Republican dominance, resulting in huge and growing disparities of wealth. Once again in industry after industry, winners and the well-connected get paid huge amounts. Miniscule differences in capability are remorselessly amplified by a bidding war into dizzying highs and lows of pay. Losers get paid less and less, as a perennial excess of low-skilled labor competes for lower wages, helpfully globalized to evade domestic social and political accommodations. Those in the middle make do on two salaries where one would have sufficed a generation ago, because that is exactly what the labor market will bear. Those who have been entrusted with the money of others have been particularly flagrant in rewarding themselves, under the philosophy that they needed to "share" the wealth in order to be properly "motivated". Yet the motivation of others farther down the ladder of connections and capital is left to the bare exigencies of survival in an atomized labor market.

At any rate, one can see a pendulum swinging back and forth, between natural capitalist differentiation and popular indignation and revolt, adjusted by the technical possibilities of each epoch. Now that a new administration proposes to raise the progressivity of the tax code in an effort to mitigate wealth disparity, the media, at the behest of its owners, cry "class war", uttering their worst fear and taking belated refuge behind the state that they had worked so hard to degrade and defang. But it is not war that the majority want, but a re-balancing of the system. It is simply another step on the long road to the golden mean of a morally defensible (in idealistic terms) as well as practical society with optimal prosperity. (Prosperity itself being a moral good, leading to cosmopolitanism and peace, while poverty leads to more desperate competition, violence, chaos.)

In the end, each extreme, either of idealistic utopianism or of pitiless capitalism, is catastrophic in both moral and practical terms. Ancient Rome died essentially of unfettered crony capitalism, where the rich garnered vast resources on huge estates, and used their political power to relieve themselves of taxation. The result, once new resources stopped flowing in from foreign conquests, was decay of the economic system which had become top-heavy and corrupt. We see this today when our own guilded ages become so top-heavy that the economy shrinks because all the riches at the top can not make up for the far larger lower class virtually unable to participate in economic activity.

The golden mean of moderated, regulated capitalism/socialism keeps the creative energies of humanity flowing, both in the form of competition between people and firms, and in the form of cooperative creativity that rests on freedom to innovate and fail without personally disastrous consequences. Universal health care makes us free in important ways, just as low taxation makes us free in different ways.

Incidental link:

• My favorite correspondent reaches a new low of sputtering hatred.
• A closely related economics article at salon.
• And yet another related review of Karl Marx, by Hitchens
• Cringely calls the bailouts immoral, later on.

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To decrease contemporary corporate cronyism, a few suggestions for revised corporate governance:

1) Prohibit any corporate director from serving on more than one board. This job is important enough to be done well. Bringing more talent into this system is important- into the upper echelons of corporations generally. Being on a board should be a serious job, not a chummy spa trip.

2) Prohibit executives from serving on a board of their own or of other companies. They already have a job. That should be what they are doing and focusing on. Serving on another board automatically compromises their responsibilities to their own company. As for their own company's board, this is even more important. The company's board needs to be distinct from its management, so that they actually check each other, rather than scratch each other's backs.

The special case of a founder being involved in a company would present them with the choice of being an executive or a board member. For private (non-public) companies, something more lenient could be arranged, such as allowing large shareholders (owning 10% or more shares, perhaps) to be on the board, whether they are executives or not.

3) The board organizes and runs annual meetings and shareholder voting, including the election of new board members and the review of executive performance. They should have their own small staff or be able to outsource details of this task so that the executives of the company can, again, focus on running the business of the company, not the business of the board. Conversely, the management would have a voice at the annual meeting and elsewhere to say whether the board had run off the rails (or to resign if needed), but they would never be the same as the board.

4) Stock options should be given on a 5-year plan. They can not be redeemed until five years from grant date, and then would be redeemed at the mean price of the ensuing year, not the spot price at time of redemption (to be organized by an escrow system of automated selling). This means that redemption decisions need to be made a year in advance. Companies would publicize all requests for year-out redemption by executives, sharing key information with the public, including size of options and when they decide to sell. The bottom line is that managers, if incentivized with stock, should be tied to it similarly with long-term stockholders, rather than day-trading against them. Large bonuses and other forms of non-salary pay should be treated similarly, paid only after some time has passed to make clear whether past performance actually merited it.