Sunday, December 16, 2007

Cheating in American Baseball

A report was just issued stating that many renown players working for professional baseball teams in America have used steroids and other muscle-building drugs to enhance their natural ability and win out over other players.

Here is an instance of moral grand corruption.

The ethic of sport - going back to Greek Olympics - was supposed to be in the character of the athlete - in his or her mental effort, self-discipline, skill and courage. Winning was only icing on the cake.

Now winning seems to be all and at any price. A winning record leads to more money, lots more money, in the business of professional sports.

Just like winning in the stock market - to get the most out of it for ourselves, why not take a few performance enhancing drugs? In the world of finance, such drugs are misleading information about a company's prospects. See Enron, WorldCom, et. al.

Misleading information gives a company unfair advantages in the competition for investor interest.

Professional sports in the United States provide moral and ethical standards for a large number of Americans. The behavior - noble or vile - of sports celebrities triggers imitation among the young and, thus, has a public good quality about it. The behavior of such role-models cannot be overlooked by society.

What surprises me is the lack of programs in business ethics for professional sports companies and their employees.

Sunday, December 9, 2007

Like Death and Taxes - there are consequences

Advocates of cash flow as the “summum bonum” of capitalism often take the position, as they must, that there are no negative consequences attendant upon such a course of business enterprise worthy of note.

The assumption they make is that the enterprise is autonomous, separated from society by various walls such that the only costs of material concern are those that show up on the income statement.

Thus, the “costs” of enterprise born by stakeholders – the environment, civil society, customers, employees, investors, creditors – do not count. They can be ignored.

This point of view is very short-sighted and so wrong as several developments here in the United States make very clear.

First, in the sub-prime mortgage mess; The consequences of rising foreclosures on home mortgages were set by entrepreneurs who extended mortgages to borrowers who were very much at risk of non-payment when conditions changes. By pushing off risks on borrowers with marginally secure abilities to pay, the originators of the sub-prime lending set off a sequence of developments that carried within its economic logic high risks of social dislocation.

With homes in foreclosure, with the prices of homes dropping for America’s great middle class, with the banking system under great stress, the government could not leave the market alone. Anxieties were too high and the demand for protection from market forces too intense.

So, President Bush felt compelled (it’s presidential election season as well and his party is not doing well in the polls) to step in. He imposed an emergency freeze on the raising of the interest rates on certain mortgages. The freeze will last for five years.

Nothing could be more alien to his principles of free market autonomy, where private actions without government regulation bring about optimal outcomes for society.

The moral lesson from the sub-prime adventures is: as you sow, so shall you reap. There are consequences for business that don’t always show up on the quarterly income statement.

Second, there are recent developments with UnitedHealth Group. This company in Minnesota underwrote for premiums the health care costs of millions of Americans. It paid its CEO William McGuire hundreds of millions of dollars and gave him stock options as well. The company’s stock rose in the market.

But it then turned out that many of his stock options had been rigged – backdated – to give him even more financial advantage.

When the back-dating was discovered, the Securities and Exchange Commission began an investigation and investors brought litigation. On December 6, 2007, McGuire decided to settle the claims against him. He agreed to give back to the company some $420 to $460 million in stock options and pay and to pay a $7 million fine.

He is still left with over $500 million in stock options so he will be able to live for the rest of his life as a gentleman should.

But there were consequences that followed upon his taking short-term financial advantage of the company.

Now, one way in which McGuire’s leadership of UnitedHealth Group had led to substantial profits was to squeeze its customers – the insured and doctor’s to be paid for their services. As a result of these business practices, the company in recent years lost 315,000 customers this year and angered doctors.

So, as a consequence, it is changing its practices. It will now show doctors and patients on the day of a doctor’s visit how a claim will be paid; it will pay doctors more quickly; UnitedHealth employees will be given incentives to put quality and patient advocacy first and productivity (i.e. cash profit) second.

Like death and taxes, consequences cannot be avoided. There is no free lunch in capitalism. Ethics is material to the bottom line.

Saturday, December 8, 2007

In China it's culture, not ethics or CSR

A conference this past week in Beijing was most informative on several levels. The topic was to discuss in a Chinese context business values and corporate culture. The audience was engaged – very engaged; more engaged than audiences in most of the conferences I have attended where the topic is business ethics or corporate social responsibility.

The substance of our discussions in Beijing was essentially the same concerns as inform discussions of business ethics or corporate social responsibility. But the conceptual framework, the lens, brought to bear on the subject matter was unique. The starting point was “culture”, not ethics, not the business case for taking stakeholder concerns into account when running a for-profit enterprise.

In prior workshops on business ethics in China my observation was the absence of concern for the topic on the part of Chinese business owners and managers. This recent discussion, however, was very different. It struck me as being very authentically Chinese while the previous meeting seems now in retrospect to have been the extension of a foreign framework into an unresponsive Chinese intellectual and emotional milieu.

Something like the assertion of exterritorial legal jurisdiction in China by the western powers during the glory years of Western colonial dominance. For example, Western powers had their own tribunal in Shanghai to resolve matters according to French, British, or other European legal norms and practices.

In startling contrast, in this past week’s conference and panel discussions, the Chinese asserted conceptual ownership of the subject and fully engaged their minds as well as their emotions.

It appears that, for them, the discussion of “culture” is not a trivial matter.

Which fact, I suppose, should not have come as a surprise to me. After all, Chairman Mao’s great effort to shape China in his image was undertaken as a “cultural” revolution.

In ways that were quite exciting and revealing, speakers and commentators asked basic questions as a starting point on the way to defining appropriate levels of business conduct.

They asked what is human nature? Are people basically sinful and greedy? Do people have a capacity for moral behavior? Can they acknowledge the claims of society on their freedom and autonomy? Don’t we have to choose between “profit” on one side and ethical conduct on the other as Mencius argued so many years ago?

I felt as I listened that the objective of the conversation was to find a formula for “market freedoms with Chinese characteristics.”

The need to find such a formula is palpable as the Chinese Communist Party is moving more and more beyond Deng Xiao Ping’s formula of “Socialism with Chinese Characteristics” that justified the program of reform and opening up that began some 30 years ago.

The unstated question in everyone’s mind in the conference seemed to be “what kind of company behaviors will maximize market efficiencies and so create wealth but at the same time not be destructive of social harmony and non-financial values?

“Corporate culture” seemed to be assumed to be the meeting point of profit and social responsibility. One participant described the role of culture in a market setting as the brakes to off set too much pressure on the gas pedal. Excessive acceleration – a metaphor for excessive individualism or self-seeking – is tempered by putting on the brakes and keeping the car under the speed limit or safely hugging the road as it twists and turns.

This assumption is not a bad one in my opinion. Culture is a restraint on individualism. Culture is the action of the moral sense within us; culture arises within communities and sustains communities with commonalities of values, behaviors, practices, understandings.

Our discussions in Beijing had the following logic: with the right culture in place, companies will be ethical and socially responsible.

But the approach to implementation starts with culture – the psychology of the human, the needs and motivations of people - not with debates over moral theory or a list of stakeholder interests.

At the same time, a discussion of “culture” provided a way to reclaim China’s moral heritage. We spoke of Confucianism, of Taoism, even Buddhism, as rich sources of cultural “brakes” for companies in today’s China.

I very pleasantly felt that the Caux Round Table had a constructive role to play in this conversation as we have in a number of cultures been successful in mapping global standards of ethics and corporate social responsibility to core values within national settings. I was very pleased that our colleagues Dr. Roger Conant, Hiroshi Ishida, Andy Whitford from Westpac Bank, and Brinton Scott from the Fredrickson & Byron law firm office in Shanghai could make notable and constructive contributions to the discussions.

It’s the same all over

I arrived in Beijing on Sunday night the 2nd of December for a conference discussing CSR and the cultural imperatives of Chinese companies.

This morning in the paper were two front page stories that caught my attention.

One was about the sentencing to 16 years in prison of a Shanghai “tycoon” for abusive “brute” capitalist behavior. He had embezzled money, forged tax receipts, defrauded investors in the stock market, among other criminal acts carried out through the means of business enterprise.

This story put to me once again the role of character in free markets: cheating is everywhere; laws alone don’t stop it; free markets can clear it out only after the truth comes to light.

There would thus seem to be a constant, universal need to focus on ethics, character, personal goals and integrity as a third counter-weight to the human tendency to abuse power in private hands.

The second story was the report of a Chinese government agency that the average temperature in China so far during 2007 was at the highest level since 1951. This marks the 11th year in a row of higher average temperatures than in previous periods.

Systemic temperature rise is prima facia evidence of global warming. It does not provide evidence of the cause or causes of the trend, but does leave us with the fact of a change in our environment.

And, to me, if we don’t like the implications of the trend, regardless of its causes, we should be taking steps to moderate the rise in global temperatures.

Wednesday, November 28, 2007

where's the protest? Sub-Prime lending excesses as one more failure of capitalism

I don’t get it. Violations of honest business practices that produced the scandals at Enron, WorldCom, Health South brought about widespread rejection of short-termist thinking as a basic principle for capitalism. But the current crisis in American credit markets precipitated by rather similar violations of best practices has not provoked a similar degree of alarm and concern.

But the current failure of market-behavior to reach beneficial outcomes is more damaging perhaps to the American economy and society than the scandals of only a few years ago.

The consequences of Enron and related abuses of financial reporting obligations punctured a liquidity bubble in the stock market which led to a large fall in the prices of securities. Employees of Enron in particular, which was forced into bankruptcy suffered heavily and many who were buying stocks in the hopes of a continued rise in prices lost money. Within a few years, however, the markets recovered. Short term losses were made up with longer term gains.

New legislation was introduced mandating better financial reporting and oversight of the auditing function to prevent a re-occurrence of those particular scandals.

But this time, excessive extension of credit to sub-prime borrowers seeking to buy houses has boomeranged into a serious threat to the entire American economy. Investors are in a hurried, unreflective, general flight to quality and so many would-be borrowers are being left without cash and needed working capital to sustain their businesses and to expand the production of goods and services.

The system of finance and credit supports an economy; any dysfunction or retrenchment in this sector undermines the entire society’s well-being.

But in particular, the sub-prime crisis has led to more foreclosures on homes, lower housing sales, and falling house values. The poor and the middle class are most affected by this negative move in the activity volume in the housing industry and sectors that depend on consumer demand for housing and related fixtures, etc.

More wealthy Americans have a range of assets at their disposal; the poor and most of the middle class have their houses as their primary source of equity capital. Lower housing prices errode the wealth available to those who need it most, making them more financially vulnerable just as the economy becomes more difficult.

This is not the outcome we should want from modern capitalism.

A price will be paid by those who spawned the excess in risky lending. Both Merrill Lynch and Citibank have lost their CEO’s as a result and taken huge write-owns in their equity. And more bad news for the banking and financial sectors and for the owners of derivatives is still to come we hear.

One reassuring point, I suppose, about markets is that reality always sets in. There is no escaping karma; consequences cannot be avoided by wishful thinking. Raising the level of risk by making too many risky loans leads to some degree of risks actually coming true. And somebody must pay the price associated with those losses when they occur.

So it is with every speculative bubble: someday the bubble bursts.

The trouble, I think, with running transactions on a fee basis (some promoter takes some money and runs) is that fees shield the instigators of the transaction from having to live with long-term risk. Their market function is only to put the deal together. Others are left to bear the consequences.

So it was with the aiders and abettors of Enron special purpose entities, excessive investment in telecom and dot-com companies in the late 1990s and with the packagers of sub-prime mortgages and related derivatives.

Where fees are too high and too easily obtained, systemic risk management suffers. This is an iron law of human nature.

Monday, November 19, 2007

A Bucharest Glimpse into the Ethics of Hedge Funds

Romania now is part of the European Union, but traces of its past are more than evident in Bucharest. The massive, hubristic presidential edifice commissioned by the late despot Nicholas Caucescue hulks over the city on a site cleared of old houses and churches which had withstood centuries of pre-Communist turmoil.

And the Romanian economy, while growing and birthing a middle class, is more of a transitional economy than a developed one.

Bucharest needs infrastructure – better roads, underpasses, overpasses, ring roads, new streets, stop lights that work, parking ramps.

The new middle class is putting is disposable income into cars. There are too many for the streets of Bucharest, too much time wasted in traffic jams and no place to park them. The city needs parking facilities.

A business man has a plan. At least a small one. He owns a parcel of land in the central city and has estimated the cost and earnings of building and maintaining a modest parking ramp – 600 cars – on the site. It will pay off with interest in 5 years. But he can get no investors to finance the project.

Romanians are in a speculative mode; quick turnaround of capital at a good return – get your money back in 6 months at 30% interest.

Asset speculation – whether on financial exchanges, in wartime economies, or in real estate – always leads to trouble. It is built on the twin pillars of unrealistic valuations and “irrational exuberance” – the human propensity to gamble when facing the prospects of making easy money. It is a dysfunction that undermines the rationality of capitalism and pre-dated the emergence of capitalist production and systemic accumulation of invested wealth.

While in Bucharest to speak on corporate social responsibility recently, I met by chance a young investment broker from the UK seeking to earn commissions by channeling money into Romanian real estate projects. He is offering London hedge funds 400% returns on money they invest in Romania. They love the prospects he told me. Money is coming into Romania.

But not for parking ramps, needed infrastructure and other long-term payoff projects.

The effect of the hedge funds is to further distort Romanian economic priorities towards short term speculation.

Is this really very helpful?

Sunday, November 18, 2007

The UN Panel Report on Climate Change

My first response to the release of the report on Global Warming by the UN Inter-governmental Panel on Climate Change was, for me, a new thought – one no doubt well understood by others before me.

The general recommendation as to the continued human release of green-house gases is two fold: one, to switch our source of energy away from hydro-carbons and, second, to use less energy. The second alternative seems, at first, merely a prescription to increase the cost of energy in order, through the supply/demand mechanics of classical micro-economic theory, to reduce energy consumption.

This alternative is not welcomed by many who link increased cost of a basic input for global production to lower global output and reduced wealth creation.

However, the flip-side of less use could be higher productivity.

The wage rates for labor have risen steadily with industrialization and post-industrialization as rates of productivity rose and rose.

Less and less units of labor were needed for production of the same quantity of output, so per-unit labor costs could go up without triggering higher prices for consumers. Each unit of labor contributed to the production of more and more goods and services.

Productivity increases for labor inputs came with the introduction of capital improvements to the means and methods of production. With machines and other supplements to human handiwork the value generated for society by each working individual grew exponentially. Adam Smith understood that this increase in output through specialization was the origin of the wealth of nations.

Should we not apply this same thinking to our inputs of energy as well as of labor?

If we make energy more productive – getting more from each joule and kilowatt, each amp and BTU, then might we not enjoy growing prosperity with less energy consumption?

A higher cost for each unit of energy consumed would not necessarily lead to higher total costs for consumers and reduced growth for the world.

The action step that should flow from taking this point of view would be at a minimum better measurement and public disclosure of energy efficiency in all uses of energy.

Tuesday, October 23, 2007

What if we measured a community's capitalized income stream?

As I was sitting during our 22nd Caux Round Table Global Dialogue in Seattle last week listening to a discussion of intangible assets as enhancing company value, my thoughts suddenly jumped to a construct of a community – city or nation – as a company.

What occurred to me was a thought form of the community as a system of cooperation to achieve better outcomes in this world for its members. How would we measure the success or failure of such a venture? What would be its bottom-line metrics?

Well, in the first place they would be mostly intangible – quality of life, educational achievement, health – mental as well as physical, culture, morality, happiness, in addition to wealth, infrastructure, rule of law etc.

Then I thought what if we got simple and looked to the income flow of the community – to the entire amount of earnings that flowed to its members in a year. The more income, the higher the capital value of the community. Lower income would result in a lower capital value.

We would need to arrive at a capitalization multiplier to apply to the income stream to establish the capital value number – a million dollars income X 10 would be a capital value of ten million. If the capitalization multiplier were higher, the community would be worth more; if the multiplier were less, the community would be worth less.

So what? I then thought.

Well, if a community has higher income or a higher capitalization multiplier, it could do more – pay more in taxes, buy more goods, spend more on culture, public health, education, obtain a more reliable and fulsome social safety net, build better roads, buy newer, more sustainable technologies, take better care of the environment. In short, with more money, it could provide for more social justice.

And, further, higher value would mean that members of the community would be able to move up Maslow’s scale of needs and motivations from satisfaction of the material to cultivating more abstract concerns for meaning and purpose.

The capitalization multiplier would be some measure of social capital – the risk of loss or harm to the income flow as against the chance of increasing progress and success.

But with respect to both earning income and having a high capitalization multiplier, business would be central to community justice. Business – of all forms – is the primary generator of income for any community.

We might do well, therefore, to value well what business can do for us and so work to minimize its harmful externalities.

Just a thought.

Thursday, October 11, 2007

What is so culturally different about American Capitalism?

In so many conversations about the ethics of business, corporate social responsibility, and social safety nets – especially in Europe – American capitalism has been singled out as being more harsh than other national versions of the free market economic system.

America, it is said, glorifies “cowboy” capitalism, a full adversarial, devil-take-the-hindmost, form of competitive advantage where the investor’s dollar trumps all other values and where the money kings of Wall Street set the goalposts of success.

It does seem to be true that the voice of free market fundamentalists is stronger in American culture and politics than it is in the UK, Canada, Australia and Europe, all of which share common cultural origins.

For these American secular fundamentalists, as seems to be the case for many other kinds of fundamentalism, a sense of self-righteousness about their beliefs and behaviors is palpable in their conversations and their judgments. They are convinced that wealth elevates and brings with it moral redemption.

So, for example, from this perspective, government taxation of private wealth is an invasion of one’s personal righteousness and an attack on one’s meritorious achievements. The approach is a curious blend of materialism and spiritual superiority, but it galvanized the politics of Ronald Reagan and George W. Bush, among others.

At the level of the corporation, this creed holds that seeking bottom line financial profits is sufficient to meet moral expectations of right conduct in business.

Where did this fundamentalism in business ethics come from?

I think I have finally stumbled across the foundational experience of this special American approach. It was in the 1880’s, especially in the year 1883 when Yale Professor William Graham Sumner wrote an article entitled “What Social Classes Owe to Each Other”.

Sumner created a fusion of old American Calvinism and Herbert Spencer’s Social Darwinism. The mixture proved to be a heady and powerful brew for subsequent generations of Americans. It became the gospel of the Republican Party which used it to win many elections.

Calvinism had sought eternal salvation from sin through faith and submission to the grace of Jesus Christ. Calvinists were sober, hard working, honest, reliable, trustworthy and, therefore, good credit risks. They gave birth to modern capitalism in Holland, England, Scotland, and the American colonies during the 16th, 17th and 18th centuries.

Calvinism did not set out to create the material advantages of capitalism; rather it appears that capitalism evolved as an unexpected consequence of Calvinist beliefs and behaviors. (This is the thesis of Max Weber, which is noted but controversial, especially on the part of Marxists.)

On the other hand, Herbert Spencer writing in 1851 did not seek to prove the truth of religious beliefs. He was a materialist looking for scientific laws about evolution and necessary human behaviors. Spencer argued that human society was a struggle where the fittest would survive best.

Sumner, in the American Calvinist tradition where correct conduct led to worldly success, fused Calvin’s theology with Spencer’s fascination with competition. Sumner asserted that those who succeeded in the capitalist race for wealth did so because of their character. They were worthy and so their dedication, self-sacrifice, and shouldering of risk were rewarded as if by the laws of nature and nature’s God with material success.

Those who did not succeed, suggested Sumner, were not morally worthy. They were slackers, he said, and received the just deserts of their inferior aptitude for virtue. Their sinfulness, as it were, produced their lower socio-economic condition.

We might say that Sumner’s vision has it that God loves winners; those who gain wealth are winners; those who don’t are losers; God doesn’t love them and so neither should we.

In particular, both Spencer and Sumner vigorously opposed public programs to tax the rich and subsidize the poor. As Sumner put it, the upper social class owed nothing to the lower class. How clear, simple and harsh. He wanted to “put down schemes for making ‘the rich’ pay for whatever ‘the poor’ want.

Sumner said that to learn how to live happily we should investigate “the laws of nature and deduce the rules of right living in the world as it is.” These rules, he said, call for labor and self-denial (how Calvinistic!) repeated over and over again in learning and doing.

Sumner concludes at one point: “Hence it appears that the man who has his self-denial before him, however good may be his intention, can not be as the man who has his self-denial behind him.”

To the victor in the competition demonstrating self-denial go the spoils. He or she becomes the successful capitalist and has wealth to prove his good character.

For Calvin, possession of a character worthy of God’s grace led to other worldly salvation; for Sumner, the American, possession of that same worthy self-discipline, humility and resolve led to capital accumulation and victory in the race of life in this world.

For Sumner then, as for many American social conservatives today, it is not the proper place of government to rearrange what nature and God have ordained.

So American “cowboy” capitalism may not be just run-of-the-mill Social Darwinism, but more exactly a kind of Calvinistic Darwinism.

Friday, October 5, 2007

GM's new union contract - a revolution in capitalism?

A revolution in the modalities of capitalism just happened in the American auto industry and few took notice.

General Motors Corp., a once hugely successful manufacturer of automobiles, negotiated new terms of employment with its union. No doubt, union acceptance of these new terms was forced by the downturn in GM’s profitability and financial prospects.

This year, for the first time, foreign brands captured more than 50% of the domestic American market for automobiles, with Toyota overtaking Ford in number of vehicles sold to boot.

Under the new contract, the United Auto Workers accepted responsibility for payment of health-care needs of retired GM employees, some US$51 billion in future expenses. For its part, GM financed these future costs with a one-time contribution of US$35 billion into a trust fund. The fund will be managed by the union. Income from the fund will pay future health-costs of GM retirees.

By removing from its balance sheet this liability for future costs, GM no longer needs to reserve against such future expenses out of current income. It will become more profitable immediately, or it can cut the prices of its cars to better compete against foreign brands.

The revolution in capitalism inherent in this innovation has two aspects: first, the employer – the capitalist – is no longer put in the position of providing full and fair life-outcomes for its workers. The relationship between capital and labor becomes less adversarial. In classical 19th century capitalism, for the company to gain, its workers must lose, and vice-versa, in a zero-sum competition for a share of enterprise profits. Now, once these future liabilities have been off-loaded from the company to the union, workers - through their union - must look more to their own welfare.

The company can more easily look to the market for pricing signals and brings its costs in line with customer preferences. And from the worker’s perspective, there will be less reason to load all their financial hopes and expectations on the company’s shoulders, forcing it to lose market share through higher costs. With alternative structures protecting their interests, workers can be more market savvy, in line with company needs and objectives.

Second, once unions provide health-care benefits for retirees, they are aligned in concept with provision of other long-term advantages for workers, such as life-long learning, skill enhancements, relocation assistance upon layoffs, etc.

The unions can plan to meet the financial, intellectual and retirement needs of workers more independently and creatively. This challenge, if well met, will give workers new reasons to value union membership as a kind of life-long cooperative to enhance the capital values – skills, educational accomplishment, savings, etc. – that they bring to global competition.

Thursday, September 20, 2007

Who is on the central committee of the American ruling class?

An old chestnut of the Marxist left had it that captains of industry were the central committee of the ruling class in capitalist societies. The mythic stereotype persists in progressive circles that what is wrong with society flows from the selfish proclivities of its ruling elite – an elite that, in capitalist societies, grows out of business as lichens on a rock.

Remove the elite, this theory goes, and all will be well, or at least much better.

This month’s Vanity Fair magazine in the United States offers an opportunity to reflect a bit on this thesis about capitalist elites.

The magazine identifies the 100 members of the New American establishment. Where do they come from?

Thirty one made their money in or through Hollywood.

Fifteen come from the world of fashion (Gucci, Revlon, etc.).

Nineteen from the media.

Eighteen from Wall Street or other finance and investment houses.

Nine from business – but consumer businesses like computers, Google, Walmart, Sony,, Starbucks.

Three held political office, but those one was from media and another from Hollywood before they reached elected office.

Then there were five outliers - an architect, a casino owner, a philanthropist, an advertising mogul, and a Russian Oligarch.

This list hardly looks like the traditional capitalist conspiracy to squeeze out the surplus from the sweat of peasants and proletarians.

The themes of success here are: consumer self-indulgence, celebrity, low-brow entertainment, and easy money taken from all those tempted to speculate in securities. Kind of a disparagement of American values and standards if you ask me.

Of course, Vanity Fair does not represent your top of the line Marxist sociology or even very good class stratification analysis. But it does reflect well its own cultural biases.

It reveals the commanding heights (again to use old Marxist terms) of the post-industrial society.

I am not sure what systematic role there might be within this elite for business ethics or corporate social responsibility. Warren Buffet and Bill and Melinda Gates, however, were included in the group and they are major philanthropic donors now. So all is not lost.

Monday, September 17, 2007

No Free Lunch

A story in our local paper makes for general reflection about markets and capitalism.

Out of concern to reduce greenhouse gas production and hold off global warming, many are turning to the use of ethanol for a fuel. Ethanol in the United States is made from corn. Demand for ethanol is pushing up the price of field corn. This makes some farmers very happy.

But not all farmers. The corn farmer's win is the hog farmer's loss - and the dairy farmer and those who feed cattle for the slaughterhouses. Corn is a cost for these farmers, so higher corn prices mean lower profits for them or higher prices for consumers of meat and dairy products.

The National Corn Growers Association is lobbing the Congress for more ethanol production but the meat and dairy lobbyists are opposed.

Prices are like that; they divide to conquer. A high price is good for some and bad for others and vice-versa. It is hard to think of a price that can keep everyone happy in the status quo. Prices change and such changes impact standards of living, use of technology, accumulation of savings, etc. Markets are constantly shifting opportunities and upsetting establishments. They are demanding and uncompromising. Some would say disciplined while others call them immoral and insensitive to human needs.

One has to be nimble and flexible to ride the currents of markets without capsizing. Facing up to the need for change, for invention, adaptation, is a character trait and an intellectual ability. Surviving in a market environment is a return on human capital.

But it also takes finance capital. Having a rainy day fund makes it more probable that new opportunities will be found and used when prices shift against status quo expectations.

Steve Young

Wednesday, September 12, 2007

For Samuel P. Huntington

Where have all the ideas gone?

We have academics by the droves and more graduating every year but where are the ideas that drive civilization to its highest and best uses?

As modern society specializes more and more, sub-divides and compartmentalizes to get better mastery of technique, great and grand ideas are more and more marginalized and pushed to the sides of our consciousness. Nowhere is this more true than academia where professionalization in specialities leads to promotion.

Prof. Samuel P. Huntington over a decade ago put forth an idea - is there an inevitable clash of civilizations? His vision of a problem has colored our lives and policies after the collapse of Communist and the rise of sectarian fundamentalism and ethnic zenophobias.

Sam was my tutor 40 years ago in my senior year of undergraduate study. I have kept in touch, not regularly but fondly, now and then over the years. Sam has remembered me and been warm and helpful in our subsequent meetings.

But I learned yesterday that he is not well and most likely will be unable to contribute any more "ideas" to academia and global civilization.

Sic Transit Gloria Mundi. All must pass and this too will pass.

But right now I feel a deeper sadness over the sumbolism of this loss - where are the ideas? How will we move forward for our children and grandchildren without ideas? How will we find courage and the will to work for a common good without profound thoughts and understandings?

If all is trivialized, then everything about us, in us, around us, will be trivialized.

I feel grateful to have worked with and been challenged by Sam Huntington.

And I hope our work at the Caux Round Table will always gather in and promote "ideas" in the face of all that seeks to marginalize our humanity.

Steve Young

Saturday, September 8, 2007

Look what the cat brought in!

from Warsaw

Globalization has its fans and its detractors. Human trafficking around the world has indeed spread new technologies and changed living conditions. But transportation as a human contrivance has its drawbacks as well.

I think of invasive species coming into the United States through international commerce: the Zebra mussel and Dutch Elm Disease and now Asian pythons loose in the Florida swamps and doing very well in their new habitat to the distress of older occupants.

But a visit to Cracow yesterday brought me an example of humans as invasion species. There is now a booming trourist trade from the UK and Ireland of people coming just to Cracow for a weekend to get as drunk as their bodies can stand. They fly in on cheap discount airline flights. They get so drunk they fall over over the streets around the old market square.

A brochure in my hotel room advertised the "booze cruise" - you sign up for a cruise on the river to get so drunk that you can't walk - but the boat has chaperons at the railing to keep you from falling in the Vistula River. But you are assured by the brochure, no matter what, the booze will keep flowing.

Cracovians are less than pleased with this turn in their tourist market. One said to me: "This is not what we had in mind when we joined the European Union."

They also worry over a Gresham's law of tourism - offensive tourists drive away the good ones.
and cheapen in all manner of ways the community that seeks to live off the largess of strangers.

Entrepreneurial cost-cutting as an innovation in service delivery has led to this threat to an existing environment. Do these innovative carriers have some social responsibility to correct the external costs to older Cracow customs and habits that their actions have caused?

Should they raise fares to reduce demand for the service? Screen their passengers? Demand damage deposits payable to the city of Cracow?

Should Cracow impose a tax on drinks? Ask tourists to get a license in order to drink within city limits?

Steve Young
Sept 9, 2007

Thursday, September 6, 2007

Lessons from Warsaw

Warsaw is growing. As you land in the airport as I did yesterday, some dozen or more planes are at their gates, taking off or on the taxiways - more action that when I first came here in 2005. The airport itself has been expanded. The laying of new water mains has closed several main avenues in central Warsaw and created long delays in traffic - one of the signs of successful modernization all around the world. A new shopping mall is up - across from the Palace of Culture which was Stalin's gift to the Polish people and is kept by them as a simple reminder of past subservience to Communist dictat. Streets have been resurfaced; buildings and pedestrians have less and less of that pervasive brown/grey drabness of buildings, streets, clothing and facial expressions that one associates with all genuine dictatorships of the proletariat.

The Polish economy has been growing by 6% a year. Poland is part of the European Union - a full citizen of Europe at last.

The significance of all this: capitalism works; it really works. It is a system of human activity that meets human needs and grows and expands, changes and diversifies.

Is capitalism perfect - a heavenly ideal realized here on earth? No way. As a human system it is prey to all the errors and follies that the species exults in. Like any of us seeking to be better, it needs ideals to shape and constrain its ambitions, systems of checks and balances to keep it from excess, and laws and regulations to minimize its abuses of power.

It is always a work in progress. As is said about the price of liberty, eternal vigilance is also the cost of a moral capitalism.

Steve Young
Sept 6, 2007

Monday, September 3, 2007

Labor Day in America

Today, Monday Sept 3rd, there is much commentary in the United States over the meaning of Labor Day.

I associate Labor Day with American Capitalism. As I remember, it was initiated to discourage American workers from celebrating May 1st, the day set aside by the Socialist International for honoring and elevating working men and women in the early phase of global capitalism.

The American political elite wanted no truck with socialism and, as a result of this political agenda, set aside a day for labor to be honored within a free market capitalism where individualism and rights of free association were regarded as correct socio-economic scripture.

Socialism is now discredited and Communism is dead. So May 1st seems to have become a superfluous holiday.

So too in many ways has "labor" day. "Labor" as a factor of production is becoming an historical artifact. Workers and employees will always be a part of product - but "labor" with its connotation of physical human efforts, sweat, and drudgery is less and less part of employment - especially highly paid employment.

Value in the free market increasingly goes to forms of capital - not physical power paid for as a commodity in hourly or daily units. Finance capital gets higher and higher returns. The rising share of national income in the United States held by the well-to-do is to a great extent a reflection of their participation in securities ownership and the rising return to securities over the last 40 years.

Reputation capital - brand equity - gets a good return.

Human capital - productive, education, specialized employees - gets more return than human labor power.

Management skills - human relations skills - bring more than assembly line or trade union work. White collar is more pervasive these days than blue collar.

Knowledge, invention, intellectual property rights - all get higher returns these days.

Manufacturing as a share of national income in the US is declining - not just because of outsourcing to low cost producers, but as a result of the information and computer chip revolution in human civilization. Just as agriculture in the US now absorbs a tiny fraction of the work force - about 2% I think - (once it was over 80% before the industrial age got going), manufacturing done under modern conditions takes in fewer and fewer workers. Each worker is more productive and can command higher wages, but the number of workers needed in shrinking.

In short, employees are moving from costs on the income statement to becoming an asset on the balance sheet.

In consequence, our entire way of thinking about workers and employees needs to change. If they are capital assets for society, then we need to ensure that they are properly "capitalized" - with life long education, good health care, with their own retirement savings accounts, with easy access to finance capital to start their own businesses. And, moreover, the wellbeing of our workers - those who have a large responsibility in making capitalism work - is important to us all.

Steve Young

Friday, August 31, 2007

What price virtue?

One of the seemingly yet-to-be-answered questions in Western ethics asks what is the quality that makes for real virtue?

Is it the quality of our intentions? Do we act from good motives or think the right thoughts?

Is it compliance with a norm or rule? Do the right thing!

Is it making a utilitarian contribution to society and the world?

In terms of markets, the question is often asked: if we pay somebody to do something and they response to our economic incentive, are they acting virtuously? Or just out of greed? Greed is presumed by many to be both unworthy and destructive of the common good. The Christian Apostle Paul wrote that the "love" of money is the root of all evil.

So, what are we to think of Mayor Michael Bloomberg's new experiment in New York City?

He will pay parents to be good: $50 for getting a library card; $100 to take a child to the dentist; $25 for attending partent teacher conferences; $100 per family for preventive health screenings; $150 a month for having a full time job.

Suppose a parent responds positively and changes his or her behavior to get the money. Is this change of behavior good or bad? For the parent? For the child involved? For New York City? For the World?

And, if the utilitarian consequences of such payments are good for all, then why should we care about the inner springs of motivation that bring them about?

I can see that at the level of society utilitarian advantages should be supported and the incentives that produce them applauded and used.

But should such a calculus be used at the level of the individual?

If we care about the individual and his or her perfection into a meaningful and happy life, then should not our conern for their motivations take a higher priority?

And their ethical orientation can't really be separated from their "ethos" - their culture and material conditions of life.

I feel that it can be right to change people's "ethos" with material incentives to trigger good and constructive behaviors that can become habitual and draw along with them a new sense of personal identity and accomplishment.

Afterall, sociologists have long observed that norms need to be reinforced and enforced by institutional arrangements of reward and punishment.

Steve Young

Thursday, August 30, 2007

Chinese scandals

Recent scandals in China with respect to contamination of food products and lead paint in children's toys tell a business morality tale. Competition by becoming a producer of commodities, seeking the lowest possible commodity price, is not a good long-term business strategy.

The better way to go is by adding value, moving up the value chain.

Chinese difficulties show once again that low prices demand cheap inputs, low wages, exploitation of some factor of production, ignoring externalities. Seeking to compete with low prices is a road straight to some kind of dysfunction. One of those low-cost inputs will, in time, bite you badly. Avoidance of long-term responsibility in lowering costs over and over again does not bring sustainable success.

Steve Young

Tuesday, August 28, 2007

Casinos and capitalism

Macao is expanding as a center of gambling. Native American tribes use their unique status as domestic dependent nations to open and run casinos. Las Vegas is more successful that ever. Gambling in Atlantic City filled coffers when the boardwalk was no longer so attractive to middle class tourists seeking sea air and amusement rides. Betting on sports and internet gambling are here to stay. Lotteries fund government programs. in many countries. And there is always Monte Carlo.

A lot of money changes hands in gambling every day around the world. And, a lot on money changes hands every day in securities markets too. Gambling has long been condemned by moralists as a vice but securities markets are key to getting the benefits of economic growth and higher standards of living.

Casinos nourish with care and skill our propensity to fall for "irrational exuberance." In casinos on Native American reservations here in Minnesota I have watched as the room of slot machines empties of patrons as the house wins over and over. Then, suddenly, as if by accident some machine gives forth a big payout. Bells ring, lights go one and off and - patrons rush back into the room to jump on the bandwagon by giving up more coinage.

One casino in Wisconsin advertised that it had the "loosest slots around" - paying back $.97 for every $1.00 wagered. It was a 100% guaranteed losing proposition for customers on average, but the ads worked - people came convinced that they would be the ones to beat the average.

So what drives gambling? Some greed gene in our core personality that drives us on beyond where mature consideration would take us? It is only about the money? I think not. Gambling allows us to think that we might be special, different, lucky, graced with inner advantage. We like, perhaps need, that feeling.

And there is the thrill of risk, of walking on the edge, of life having tension and excitement, of anticipation for the unexpected. "Maybe this time ... Look at me. I'm a daredevil and you're not!" It is a feeling of exuberance, somewhat rational actually, that we enjoy. Gambling is a kind of distraction and entertainment. It's more than the money, its the odds.

Capitalism is different; it is time on task.

Money is to be made in business, to be sure; and for some a desire to have money is a key driver of behaviors. But the profit incentive must be encased in relationships to bring about the desired result of wealth.

Gambling is all about me; capitalism is about us.

Steve Young

Sunday, August 26, 2007

Another asset bubble - how come?

In today's (Sunday August 26th) New York Times, it said that "Many government officials and housing-industry executives had said that a nationwide decline would never happen."

So, what happened?

Cheap credit which brought higher risk borrowers into the mortgage market.

Where did the cheap credit come from? Who wanted to take on higher risks at lower prices? It doesn't make sense.

Actually, very smart people came up with this seemingly unwise investment proposition. In fact, they were basically the same very smart people who lead the investment boom of companies and telecoms and the irrationally exuberant markets of the mid to late 1990s.

In the United States housing market, new sources of liquidity were found. Home mortgages were sold by the original lenders in large numbers of separate mortgages to investment brokers who aggregated them into packages of income and secured assets (the homes) supporting securities. Investors bought the securities, sending new flows of liquidity into the home mortgage market. This is creative financing that brought money and home ownership to millions of Americans previously left out of the home mortgage market. In short, the creativity of brokers in putting together new contractual arrangements for the sharing of risk in exchange for money was of great benefit to many.

But too much money flowed in for too much risk and when the excesses were discovered, the money flow dried up.

A second force building the credit bubble supported by home equity values also came from smart people - they arranged a sharing of the risk so that the high risk could be put off on to the shoulders of those who had the financial assets to absorb it should things go wrong. Or, at least that was the theory.

The theory didn't work. Just as previously the equity markets for dot.coms and telecom companies (and Enron and WorldCom) didn't hold up as promised either.

The recurring weakness of free market financial capitalism (the tulip bulb mania in 17th century Holland; the South Sea Company Bubble in London of the 1720's; and regularly thereafter) is the market's inability to sustain equilibrium in liquidity expansion. Enthusiasm for speculation takes over and the best and the brightest go hog-wild over getting on the bandwagon to ride the market up.

When the fever is on the market, new sources of liquidity come into play, driving up prices as more and more players seek to profit from the mania. Then, as always, liquidity runs out; the smart money people realize that there is no "there" there and pull back. Prices fall until a stable point is reached were market values more correctly approximately intrinsic values.

Now private equity, hedge funds, and buyouts have piled on where home mortgage lending lead the way. Too much leverage, too much debt in relation to the underlying fundamentals.

So now we are in a necessary correction for a time.

The real correction, necessary, however, is to figure out some self-correcting prudence that could be built into financial markets and temper episodes of "irrational exuberance."

Steve Young

Thursday, August 23, 2007

And what about Iraq?

It is hard to be an American these days and not think about Iraq - every day. Not to talk about it too much with family, friends and co-workers (it is too depressing) but to think about it. On the evening news in our living room - Senator John Warner breaks ranks with President Bush; a family's second son dies in combat - will the third son who is home on leave go back to his unit or claim exemption under the policy that no family need risk more than one son in combat at once; a National Intelligence Estimate doesn't estimate the capacity of the Maliki administration in Baghdad very highly at all.

So, what about Iraq from a Caux Round Table point of view?

I would start any such analysis with our ethical Principles for Government - our suggested basis for justice and civil peace in all nations.

Our fundamental principle is that public office is a public trust.

Good government is about trust - having the trust of the people for discretionary decisions; trusting the people; holding power as a trust - not for personal, ideological, sectarian, special interest reasons - but to serve those who depend on government for weal or woe, giving them security and opportunity.

Iraq today just doesn't have much trust; its supposed national government is not a public trust for most of the people. Some 2 million Iraqis who value stable, just civil society have fled the violence and sectarian killings. Those who remain don't evince much capacity to trust other Iraqis.

So from the CRT perspective, Iraq doesn't have in place the first principle of good government. Starting from that point and trying to get somewhere closer to having the writ of effective good government run throughout the country seems rather hard to do.

Steve Young

Wednesday, August 22, 2007

Getting started

The conversations around the Caux Round Table, its core values and its Principles for Business and Government, are growing. National chapters are forming; people seek us out; we seem to have practical suggestions that others find of interest.

So the idea came - one with the times - of starting a blog to further our net of conversations and dialogue partners.

We plan to post some thoughts each day and respond as quickly as we can and as best as we can to the thoughts and observations of others.

I have found that the CRT core values - kyosei, human dignity, stewardship - and its Principles for Business and Government reach out and touch almost every daily event in the news, every business transaction that gets discussed, books and opinion pieces, and just ordinary conversations about politics, how to make money, who is doing what to whom, and what has meaning.

A blog seems a good way to touch lightly and briefly on many of these intersections between our values and principles and life as it is lived around the world.

I hope this space will draw comment and become an honest conversation about important ideas and helpful actions.

Steve Young
Global Executive Director