Monday, September 29, 2008

Markets and honesty

Recently Space Bar posted three outstanding articles by Husain (1, 2, 3) that provoked some ferocious comments. The main theme of the criticisms was that you can't blame Wall Street bankers for being selfish and greedy, if that is what works in a capitalist society. (Sample quote: "I'm amused that there are still people out there who see the fact that bankers are selfish and mean-spirited as a revelation... crises like these are not the product of some global conspiracy by evil bankers collaborating together but the logical result of really smart people working competitively in a system designed to incentivise profit that is poorly regulated.")

I didn't really have a good response to that point per se, though it bothered me: didn't companies like the Tatas earn respect from their honesty and fair treatment of employees and customers, and didn't that translate to good business? But here's an article by Will Hutton (from a British perspective, but covering both sides of the pond) that brings out this point much better than I could. Quotes:

This is not the end of capitalism, as some wildly claim; there is no intellectual, social or political challenge to a market system based on respect for private property rights, even by the Chinese Communist party. Rather, it is a crisis of a particular capitalism that has set aside respect for trust, integrity and fairness as fuddy-duddy obstacles to 'wealth generation'. What we are relearning is that without trust and fairness, capitalism risks its own sustainability, even while it unleashes forces that undermine those self-same values.... Even in the dog-eat-dog financial markets, trust and integrity are matters of self-interest. However amoral you may be, it is in your interest to care about your reputation, because if you behave badly you will not do business with me - or others - on favourable terms again.
...
Worse, now that the system is in trouble, financiers are turning to taxpayers in the US and Britain for help without understanding the other key principal of fairness - that we will consider helping those who for no fault of their own get into trouble, but not those who freely created their own bad circumstances.


He goes on to predict the nationalisation of several banks, as happened in Sweden in 1992. (The NYT, too, refers to the Swedish precedent and lessons for today.)

Trust is key, in business as everywhere else. As Hutton says, even if you are not inherently trustworthy, you had better make others believe you are.

Which brings me back to the Tatas. I wonder whether JRD Tata would have countenanced the state-government-assisted land-grab at Singur, and now that it has apparently backfired on them, I wonder if the Tata's fortunes will suffer -- and not just from the financial loss and the delay in the Nano car project.

(PS: a few seconds after I posted this, I got a mail from Kapil giving me the following quote, taken from here:

Companies which do not audit completed projects in order to see how accurate the original projections were, tend to get exactly the forecasts and projects that they deserve. Companies which have a culture where there are no consequences for making dishonest forecasts, get the projects they deserve. Companies which allocate blank cheques to management teams with a proven record of failure and mendacity, get what they deserve.

Maybe the sentiment will catch on.)

12 comments:

Tabula Rasa said...

i was offline all weekend so i missed out on the jamboree at space bar's. the one point that i don't think got brought up there was one that was drilled into me during my induction as a banker: the basis for banking is a system of checks and balances. (yes, we had fun with the punning.) seemed to me that despite their volubility none of the defenders of the poor wall street bankers ever pointed out that it was the bankers themselves who were complicit, if not instrumental, in the unraveling of said checks and balances.

wildflower seed said...

Rahul

That sample quote in the first para is quite easily tackled.

First, every financial crisis breaks on the back of a conspiracy to stave it off by stoking the bubble as much as possible. Today, we are seeing news articles about bank bosses becoming aware of their balance sheet problems well before even the real estate bubble unravelled. Do you know what they did? They started buying insurance. How did they sell their risk to companies like AIG? By lying of course. Or via kickbacks. I saw this conspiracy play out in the manner in which the bosses of research divisions tippy-toed around the issue of a possible impending crisis. I saw this conspiracy in Hank Paulson's statements in March 2008 (!!!!) that everything was ok because he had "great confidence in our financial markets and financial institutions". Sure. Really smart people deserve our confidence.

As for the second part of the statement ("the logical result" etc.), nowhere in that part is it made clear that "really smart people working competitively in a system designed to incentivise profit that is poorly regulated" refers to the financial system. This could describe the market for operating systems software (which is always a step ahead of regulation) just as easily. So why is that industry not imploding? But more importantly, this second part conveniently suggests that smartness sometimes recommends the blatant perpetuation of lies (its only a violation of an incentive constraint after all) and that because it was smartness, we cannot judge this lying.

Rahul Siddharthan said...

tr - well, one can't really blame today's bankers directly for the unravelling of governmental regulatory authority: that process started over twenty years ago, though of course egged on by the industry. But, as you say, every institution must have its own internal checks and balances, and those were not in place. Or rather, these fancy financial instruments worked until the point where nearly everyone was affected: then it all came crashing down.

ws: the point is, why shouldn't a company be dishonest if it helps them get ahead, or why should be surprised if they are? That seemed to be falstaff's argument. Of course, we all (or most of us) like to think honesty is the best policy, we all know people who took unethical short-cuts to jump ahead, we all like to think it will catch up with them in the end. In the banking industry it seems (and Hutton says the same) that the industry gave up on expecting or asking for honesty or trustworthiness, but of course customers still expected it from the industry because they didn't fully realise what's going on. And the industry thought they could keep it up forever. But it's all catching up with them now.

JF said...

The wise person can differentiate
between an ideology inherently corrupt
and that which is merely an instrument
to be used for good or for evil.

Socialsim
is inherently corrupt.
But capitalism
is merely an instrument.

But capitalism, when used
for good rather than evil,
requires those who can live free.
But not all people can live free.

Many there are who need
an ever present Big Daddy G.
Many there are who plead
for Big Big Daddy, Big Daddy G.

Rahul Siddharthan said...

jf - I think you missed the first sentence that I quoted from Hutton.

JF said...

That's the downside of trying to get fancy or clever: misunderstanding.

I was just using your blog as an outlet, but your first quote from a commenter:

"I'm amused that there are still people out there who see the fact that bankers are selfish and mean-spirited as a revelation... crises like these are not the product of some global conspiracy by evil bankers collaborating together but the logical result of really smart people working competitively in a system designed to incentivise profit that is poorly regulated.

This would represent "the unwise", those who make the self-interest attribute of capitalism synonomous with absence of ethics.

Now for one of your statements:

I didn't really have a good response to that point per se, though it bothered me: didn't companies like the Tatas earn respect from their honesty and fair treatment of employees and customers, and didn't that translate to good business?

This would represent "those who can live free."

So actually, what I said is pretty much in line with what you said, although, obviously, it wasn't obvious.

JF said...

Rahul, I'm really getting into interpreting what I wrote (that's of course, supposed to be a joke), but I see I got confused about who "the unwise" is. "The unwise", of course, would have to be a foe of capitalism, and from the commenter's quote, it's not clear whether he's a foe or friend of capitalism.

What I'm thinking is that he represents "those who can't live free."

I know this is clutter, so please ignore it.

Rahul Siddharthan said...

jf - ok, but I don't think I quite understand the "live free" point. If you want to understand what the person I quoted meant, you may want to wade through the exchange on space bar's blog, but it probably won't be very enjoyable.

jf said...

Rahul, you bring up something interesting, because when I read blogs, I'm mainly interested in hearing a particular blogger's opinion. So when the blogger quotes, I may skip the quote, glance through the quote, or study the quote more closely and then follow the link to the quote. I usually skip the quote or glance through the quote, since I can usually get the gist what a blogger wants to say without reading the quote.

"Living free" means that when people use capitalism to exploit, take advantage of people, or profit from outright evil, by one means or another, their liberty will be encroached on, probably by the government.

Limited government is dependent on people self-governing themselves. If one group in society is exploiting another group or is profiting by illicit or unethical means, you have to expect others to try and put an end to it, and in a democracy or republican form of government, government is where people turn to stop abuses or perceived abuses.

Abuses or perceived abuses, more government, more abuses, more government, more abuses, more government. That's one way in which limited government can eventually get lost.

But anyway, you've probably thought about all that. I'm not really interested in wading through their comments. I was mainly using your ideas and their ideas to go off on my own tangent.

gaddeswarup said...

RS,
I still think that Falstaff made some good points which got lost in the rhetoric. I quote one point from him:
"I don't believe we can keep these kind of crises from recurring without fundamentally changing the social ethos, and I'm not sure how we do that - beyond working through non-profits to instill greater financial prudence and having a larger conversation about what we value as a society."
Andrew Bacevitch makes many similar points in the interview with Bill Moyers Bacevich: The Limits of Power:
"The pursuit of freedom, as defined in an age of consumerism, has induced a condition of dependence on imported goods, on imported oil, and on credit. The chief desire of the American people is that nothing should disrupt their access to these goods, that oil, and that credit. The chief aim of the U.S. government is to satisfy that desire, which it does in part of through the distribution of largesse here at home, and in part through the pursuit of imperial ambitions abroad."

Rahul Siddharthan said...

gaddeswarup - I agree there is some merit in claims that this is a manifestation of the ills in society. As you say, it was buried in what one may politely call the "noise". But to equate the big guys with the poor struggling with their mortgages, in terms of greed and culpability, is incredible. The fact that anyone can give that kind of argument a hearing is another manifestation of the ills in society. And I don't think the specific problem here needed major changes in society to have been prevented. It just required better regulation and transparency of financial transactions.

(How anyone can say, with a straight face, that the "witch hunt" against Wall Street is similar to the Salem witch trials, the persecution of Jews in Germany between the wars, or the Hindutva front's persecution of minorities, is beyond my understanding.)

Tabula Rasa said...

i've said this to falsie before - he gets carried away. he lets his eloquence get the better of his intelligence.