Tuesday, February 24, 2009

What is Moral Capitalism?

Moral Capitalism is a field theory that integrates intangible moral considerations with traditional micro and macro economic postulates. In sum, Moral Capitalism asserts that interest and virtue are not necessarily in conflict; that virtue is an extension of interest rightly understood.

From the perspective of contemporary academic philosophy, the framework of Jugen Habermas most closely supports this approach to private property and free markets as preferable institutions for human civilization. Habermas points out that human actors engage a variety of realities in the course of performing their individual and collective discourses while alive in this Red Dust world.

One reality is what Habermas calls “Normativity” – the perceptional realities of the mind, the heart and the conscience. From dreams to ordinary thought in conventional languages, from mystical insight to scientific formulae, the realm of the mind and the spirit powerfully attracts the human being.

Another realm, equally compelling and controlling, is what Habermas calls “Facticity” – the material realities of hard and soft, night and day, steel and cotton. Habermas’s important suggestion is that human beings live in both realms and in the various dynamic interpenetrations between them. Ideas can be imposed on material conditions by human actions; material facts can change and so shape human ideas.

Moral Capitalism holds that business must partake of Normativity as well as of Facticity.

The role of Normativity

Material conditions alone do not suffice for business success. Most tellingly, capitalism did not arise in any of the worlds traditional cultures save one – Calvinism. This is the famous observation of Max Weber which has yet to be contradicted, if not yet fully explained. A religious context – a normative platform – consistently favored certain behaviors over others. Those behaviors provided for new social relationships of partnership, trust, and exploitation of technical inventions in order to produce new products and services in a dynamic of permanently expanding markets and economic opportunities. Thus was born the system which has come to provide the foundation for global human civilization.

Material conditions conducive to the birth of capitalism existed in China under the Sung Dynasty and in the city states of Tuscany in the 1400’s but neither China nor northern Italy converted such conditions to full-bore capitalism. Some necessary spark was missing; there was no prairie fire though the surrounding grass was dry enough.

Trust and confidence nourish business success. Reputational assets – good will and reliable, productive employees – attract custom and financial investment.

The expectations cultivated and preserved by good laws protecting rights of contract and free markets, punishing fraud and oppression and preventing theft, must be in place before business will be transacted in any significant scope and at levels of substantial risk.

Business and capitalism manipulate the impact of risk by providing rewards for those who invest and act in the present to achieve some benefit in the future. The mental state of taking risk, of gaining assurance that probable rewards offset present risk, is a function of mind in the realm of Normativity. To risk or not to risk draws on emotions and psychology as much as on rational analysis. It is a cognitive presence, not a material substance. Business cannot be without such mental efforts.

Now, risks and rewards turn on the actions of others. Business actions reach out to embrace the needs and motivations of others. Here again normativity comes into play. The actions of one are constrained by the need to comprehend and respond to the actions of others. Power in free market transactions is constrained by the need for mutuality and reciprocity. Our self-interest must be understood in a certain way: it must be understood upon the whole set of circumstances. It is self-interest placed within an ethical envelope.

Naked self-interest is quickly exposed and checked by others. Advantages quickly won through abuse of power can be as quickly lost. To do business on a sustained basis, ethical behaviors are sine-qua-non. A spiritual presence at the level of Normativity provides direction for such successful behaviors.

Successful capitalist business endeavor, then, is an infusion of spirit into matter through human agency, or a shaping of material conditions through human agency to reflect spiritual direction. Spirit gives meaning to matter and matter makes spirit manifest in the corporeal realm, objectifying it and reifying it.

Nowhere is this fusion more necessary than in the process of valuation of assets. The inducement to action and investment, the reduction of hopes to concrete measures, proceeds from placing value on some thing or course of action. The level of value ascribed – the value of a dollar, the price of a company – is purely normative and subjective. Yet the consequences of believing in a valuation are thoroughly factual playing themselves out in the realm of action and material circumstances.

The Role of Facticity

Factual circumstances contribute in their own independent right to a necessary moral dimension of successful private enterprise. Every successful business needs constructive relationships with its stakeholders – customers, employees, owners and other contributors of financial resources, suppliers, a strategy for market competition, and communities, including the physical environment. This state of affairs is effectively denoted by the Japanese concept of Kyosei –or the symbiosis that every living organism has with its supporting environment.

The factual reality of business is dependency on others: on customers for their trade, on employees for the quality and quantity of their productive efforts, on owners and lenders for working cash capital, on suppliers for appropriate inputs, on communities for conditions of law and order, trust, infrastructure, and other public goods. A business without customers is a failure; a business without workers is hardly worth discussion; a business without access to money is only somebody’s idea.

The wise business not only understands this reality, but finds opportunities to make a profit by serving the needs and desires of all its stakeholders. Business acumen is a kind of chemistry, mixing disparate elements to create new realities through dynamic interactions. The factual context is to advance one’s own interest by attending to the interests of others. This is one’s “self interest understood upon the whole”, which is an ethical state of mind. One’s use of power is constrained by consideration of its effects on others. Even a crassly calculated self-interest – if it considers all things upon the whole -rises above the “survival-of-the-fittest” egoism of brutish social Darwinism.

The approach of Moral Capitalism posits that stakeholder relationships each have a moral quality. That of customers is to set the value orientation of markets. That of employees is to be agents to a principal – fiduciaries. A company similarly owes fiduciary duties to its owners and similar obligations of transparency and accountability to its creditors. The relationship with suppliers partakes of a joint venture and its duties of mutual dependency. And, a company has an office – a set of responsibilities – to provide for the economic betterment of society.

When the range of key stakeholder relationships are considered, a theory of the firm under conditions of Moral Capitalism emerges. A moral firm takes as inputs five forms of capital – reputation capital, social capital, human capital, finance capital and physical capital. It converts these forms of capital into a product or a service, which is sold to customers for a price. Some proceeds of sales are returned as “rental payments” for the forms of capital used in production.

The stocks of necessary capital – factors than exist in the realm of facticity – each in its own way demands concern and consideration for the needs of stakeholders. Capital, then, is a social product, drawn from relationships of interdependency in a system of interactions. Capital cannot be created through selfish autonomy; it has a social or interpersonal essence and so transcends individual genesis.

Successful use of capital demands that its nature not be violated through excessive selfishness. Such exploitation reduces capital from an asset to a commodity that is consumed and not renewed. A business so destroying the source of its creative powers will soon be bankrupt.

The approach of Moral Capitalism is also informed by Adam Smith’s treatise on The Moral Sentiments, Catholic Social Teachings on human dignity, solidarity, and subsidiarity, Calvinist understandings of ministry and stewardship, common law requirements for fiduciary duties, Daoist writings on change, and Buddhist presentations on mindfulness.

Thursday, February 5, 2009

A president accepts responsibility

We had, to me, a very surprising development in Washington, DC yesterday, one right in line with some fundamental approaches advocated by the CRT and like-minded organizations.

A President of the United States quickly and without any spin took personal responsibility for a mistake. He held himself personally accountable and was transparent about the mistake his team had made on his behalf.

No obfuscations; no lame or evasive comments to infer that nothing untoward had really happened; no pointing to "enemies" or to a hostile 'liberal" or "talk-radio" media unbecomingly bent on making celebrity mountains out of irrelevant little molehills; no assertion that there was nothing more than mean-spirited, crass politics at the bottom of the embarrassing accusations.

No, just a statement that "I messed up." And even more to the point: "I screwed up."
A second high-level presidential appointment had became a liability because the individual appointed – this time former Senate leader Tom Daschle – had been too clever by half in paying, or really not paying, his taxes.

President Obama immediately took responsibility and accepted the blame. He did not try to duck or hide.

When we see good values of accountability and transparency modeled in powerful leaders, we should be grateful and express our thanks.

Would that there was more of this from political and business leaders.

What if some of those once powerful in the now collapsed Wall Street world of investment finance would also step up and say: "We messed up. It's our fault."

Tuesday, February 3, 2009

Franklin Roosevelt's 1933 Inaugural Address

In his first inaugural address of March 1933, newly elected President Franklin Roosevelt, confronting a vast and frightening economic crisis, had these words to say:

In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone.

More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment.

Yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.

Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, on unselfish performance; without them it cannot live. Restoration calls, however, not for changes in ethics alone. This Nation asks for action, and action now.

Public Goods and Financial Services: Can private interest produce a public good?

The classical conundrum of human morality leaves us unsettled in thinking about ourselves. What is legitimately ours as moral agents and individuals possessing both will and purpose and what do we owe beyond ourselves to others? And, conversely, what do other selves owe to us in respect of our selfishness?

Can we systematically do right by community if the place from where we start is filled with egoism? Or, must egoism be vanquished in order for morality to flourish?

This to me is the moral framework which surrounds discussions of what economists call “public goods”. Such goods have special characteristics: they produce many positive externalities; because they can be used by many at no additional marginal costs to anyone, they support free-rider; since no one can capture all the possible profit from the good they yield, there is no selfish incentive to produce them.

Public goods are a blessing and a boon; they add to society’s stock of social capital, promoting interactions, growth in knowledge, cleaner environments, and trust. They are akin to the good that Adam Smith famously said was produced by an “invisible hand” when private market transactions yield positive benefits to third parties, indirect and sometimes intangible consequences not really intended by the buyers and sellers.

But since private interest is unlikely to invest time and money in the production of public goods, societies that seek to enjoy them turn to government to provide what private markets will not.

National security, law and order, education, public health, roads and bridges – these are the most common forms of public goods. And, generally most advanced societies tax the private sector to pay for such public benefits.

Interestingly, the conservative point of view in recent years has pointed out that such public good need not always be provided by government. Government can tax but then pay private sector entrepreneurs to deliver the desired services – vouchers for education, food stamps to feed the poor, private companies running prisons or providing security services in Iraq.

Many are skeptical that public goods can be produced in sufficient quality by self-interested private actors seeking to vindicate their own schemes. Adam Smith’s faith in “an invisible hand” is not shared by everyone.

And, the current financial crisis would seem to enshrine this skepticism as unchallengeable.

A financial service infrastructure of lenders, banks, traders, stocks and bonds, brokers, buyers of commercial paper, etc., is the heart and lungs of capitalism. Without financial markets, commerce and industry will struggle to fund their employees, their suppliers, and their plant and equipment. Few public goods are as needed as financial services.

Such services can be purchased, of course, and can be provided at a substantial profit. So, private firms in market arrangements can and do support the financial needs of advanced industrial societies and globalization.

And yet, as we have seen in this 2008 collapse of trust and confidence in such markets, private arrangements can lead to dysfunctional outcomes that erode the amount of public good provided. Such cycles of over-leveraging and then de-leveraging at the highs and lows actually produce “public bads.”

I have been thinking about how to provide public goods recently as I walk our little dog, Jolie, in Mears Park near our home in downtown Saint Paul, Minnesota.

Mears Park is a public park covering a square city block, owned by the City of Saint Paul. It is lovely and well designed: flower beds artfully placed along curving paths; an artificial stream flowing under aspen trees to take advantage of the sloping terrain; shade trees in nice rows protecting a grassy slope; classical music playing most of the time. The Park is cool and verdant on hot summer days in wonderful contrast to the streets all around it.

I enjoy this park without really paying for it or working on it. The share of my city taxes that goes to maintenance of Mears Park is so small as to be irrelevant to my sense of my annual income and expenses. This is true for everyone who uses and enjoys the park.

But I notice limits to the arrangements that make for this public good. First of all, maintenance can be desultory and at times negligent. Grass may not be replaced when bare patches appear not cut when it should be. Broken benches are taken away and not replaced. Litter can accumulate on the paths.

Second, owners who walk their dogs do not always pick up after them. The poop can accumulate as bad examples are set by a thoughtless few and then others let their behavior fall to that inconsiderate lowest common denominator. Then Mears Park suffers from a tragedy of the commons – what is common and a potential public good becomes trashed and ruined by heedless individual exploitation.

There are no rules and no policing so individual short-sightedness (on Wall Street it is referred to as greed) gets the better of the public interest and, in the long-run, we all suffer.

What to do?

Mears Park also benefits from a group of dedicated volunteers. For no money and under no compulsion from the City, they plant and week the flower beds and pick up the trash. Their personal commitment of time and money – for no market reward – really makes the Part a public good. Without them it would most likely be forlorn and run down; tawdry and off-putting; unappealing and derelict.

So as I walk Jolie (always trying not to forget bringing a plastic bag to pick up after her) I speculate as to why these volunteers give of themselves to bring to an anonymous public the charming good of a lovely part in the middle of a city.

Their commitment of their own labor, part of their values and personality, turns part of the public part into a private space. But a private space that is simultaneously shared with everyone who comes to the park. Sort of an invisible hand reaching out from them to all comers sight unseen. Only their work is very intentional and they know others can and will benefit from their labors.

It’s odd: only a personal, private commitment brings out the best in a public good. Why do they do it?

I really can’t answer the question. I only know superficially one or two of the volunteers. One loves flowers and to garden. Working in the park gives her pleasure and a sense of achievement that she can’t get in her neighboring apartment. The other just seems like a good person, a good citizen who goes out of his way to help others.

Some trait of personal character, therefore, something in the inner moral make-up of these two volunteers brings about a public good that I can enjoy without paying for it. I do, of course, always try to thank them when I meet them working on their allotted sections when I am walking Jolie. It seems the least I can do to reward and encourage their good citizenship.

It is a civic virtue I would say. And Saint Paul is better because of the energy of that private virtue. Such virtue is a profound public good that gives up many benefits.

What if all the volunteers just walked off the job and stopped taking care of the part? Should there be retribution for their thoughtlessness? We would all suffer some and be disappointed. Our expectations of what the Park could be would be dashed.

We don’t discipline volunteers do we? Just like we don’t discipline private entrepreneurs when they walk off the job of providing us with public goods that we have come to rely on.

But is there a point where the co-mingling of private efforts and resources with the production of a public good becomes so material that negligence in the private efforts should meet with some disciplinary consequence to vindicate the public interest?

There is actually law on the point. In the 1972 United States Supreme Court Case of Munn v. Illinois the Supreme Court held that when a private business is so conducted that it knowingly becomes “affected by a public interest” that business subjects itself to public supervision and control.

The case involved a monopoly of the grain trade through Chicago, affecting the price of wheat for farmers in the West and of bread for consumers in East. The monopoly was of grain elevators that received wheat from Minnesota and the Dakotas, stored it and then reshipped it to mills and bakers in eastern cities like Boston, New York, and Philadelphia.

The business of running the elevators was private, but the consequences of the prices charged for grain storage impacted the public. The business was, said the Supreme Court, affected with a public interest – it was providing a public good in facilitating wealth and commerce and good diets for consumers. The public good was external to the income statements and balance sheets of the grain elevator companies, but none-the-less was a real good in the lives of those who depended on the trade in grain.

If financial services provide vital public goods, then the public should have a say in the risks put upon the public by those who put their capital into financial services. Private property so used in a chain of consequences should be burdened with an easement in favor of the public so that excessive self-regard does not lead to a tragedy of the commons and the destruction of wealth.