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