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CBERN Blog

A blog devoted to discussions on the hottest issues in Business Ethics, CSR, Responsible Business.

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Have The American People Forsaken Capitalism?

Originally posted by R.D. Bresnahan (September 17, 2009) on his Chaos Lyceum blog: http://bresnahanethics.blogspot.com

It is with some bemusement that I watch the various factions in Washington, Wall Street and, of course, the media expound on the issue of ‘the socialization’ of America. Radical pundits on the right warn of the dire consequences of President Obama’s ‘apocalyptic’ move toward the political equivalence of Hitler’s Third Reich or Stalin’s despotic communist regime. Rush Limbaugh in his infinite wisdom stated: "This is a full-fledged attack on capitalism, and the leftist Democrats have been seeking this for the longest time…"

On the other side of the debate, politically engaged documentary maker Michael Moore warns of the evils of capitalism while contradictorily lamenting over the free enterprise economy of the 1950s—contrasting it to the recent debacle instigated by the financial alchemists of Wall Street. Although Limbaugh and Moore (feels weird to type those names so close together) represent the fringe of the debate, the more moderate voices have made compelling arguments in defense of their respective positions with regard to the state of political economy in America. But perhaps both factions are mistaken: The warning of impending socialism at the hands of the Obama Administration or the call for socialism to save us all from the evils of capitalism is missing the point. Could it be, as many headlines suggest, that the America people are abandoning capitalism?—or—is capitalism abandoning ‘The People”?

% of Stock Market held by Institutional Investors

1950-2005

Direct Ownership of Stock held by American Households

1950-2005

Since the 1950s individual ownership of equity in American corporations has declined precipitously and has been replaced by institutional ownership—mostly comprised of pension funds and money management firms, including mutual funds. As a result of the institutionalization of participation in the free market economy individuals have forfeited their right to participate directly in the process of corporate governance. The result of this change in participation has placed the onus of accountability and responsibility on the fiduciaries that are entrusted to manage individuals’ savings. As has been referred to in the previous blogs, Adam Smith opined that “being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.” Circumstances on Wall Street attest to the validity of Smith’s insightful observation and have highlighted the conflicts of interest inherent in managed financial services. For instance, fees associated with managing money have been shown to have a significant detrimental effect on returns over both the short term and long term horizons, while being a tempting reward for accumulating vast amounts of money under administration. For example, $10000 earning a compounded rate of 8% for 25 years will become $68500, whereas, if you deduct a 1.5% annual management fee the result is $48300. Conflict of interest, which can lead to a violation of the expected level of loyalty in a fiduciary relationship, is difficult to avoid in the securities industry since conflict plays an integral role in the economic nature of the business. John Boatright in his recent book Ethics in Finance summarizes the ubiquitous conflict of interest dilemma:

“The inhabitants of Wall Street are motivated primarily by self-interest and can be induced to serve any master only within limits. The challenge, therefore, is not to prevent conflicts of interest in financial services but to manage them in a workable financial system” (Boatright 2008: 51).

Another problem of entrusting ones savings to a management firm stems from the fact that there has been increasing pressure on money managers to focus on investment strategies that concentrate short-term returns in equity markets, rather than traditional long-term investing based on durable intrinsic corporate value. In a 2005 WSJ article John C. Bogle points out that from 1950 to 1965, equity mutual funds turned over their portfolios at an average rate of 17% per year; in 1990-2005, the turnover rate averaged 91% per year. In earlier decades ‘Joe Public’ would take pride in having his shares of GM, IBM, General Electric etc. in a safety deposit box at his local bank or in safekeeping at the regional brokerage house. Today, Joe Public’s savings are abstract holdings being managed by ‘experts’ in a distant locale. The individual’s intimate connection with American free enterprise has vanished into the annals of investment history. It seems that Wall Street has replaced investing in America's future with speculating on America's credit.

A relatively recent development threatening the conventional concept of capitalism is the advent of Sovereign Wealth Funds. (SWF) SWFs are becoming a major force in international capital markets and will become increasingly important as globalization becomes an entrenched reality affecting both the culture and economy of many nations. Tremendous international wealth transfers, as exhibited by the recent global econometrics, portend further pressures being placed upon the structure of corporate ownership. This in combination with the foreign exchange reserves being held by countries such as China ($2132 billion) will continue to diminish the levels of direct domestic participation of the individual in the free market system

The cover story of Business Week in September 2000, during the boom times before the dot.com bust, indicated that Americans think business has gained too much power over too many aspects of their lives. Deregulation, globalization and corporate consolidation have contributed to the concerns expressed by individuals. It can be safely assumed that in light of the 2008 financial meltdown, individuals’ trepidation toward corporate control of their lives has only increased. Further aggravating the diminution of individual participation in the economy is the increased predominance of corporate lobbyists who have influenced politicians to the extent that government legislation often equates to de facto corporate policy, superseding policies directed towards the enhanced well-being of the individual.

The concept of free market capitalism envisioned by Adam Smith in An Inquiry into the Nature and Causes of the Wealth of Nations was intended to enhance the lives of individuals by facilitating the pursuit of ones own self interest, encouraging innovation through the division of labour and distributing wealth through freedom of trade. Smith did not intend that globalized corporate conglomerates were the ‘shopkeepers’ when he stated that: "To found a great empire for the sole purpose of raising up a people of customers, may at first sight, appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers, but extremely fit for a nation whose government is influenced by shopkeepers." Smith would have contested the contemporary capitalist paradigm due to the concentration of economic power and the diminished role of the individual in the distribution of the wealth gernerated by free markets. He certainly would not have considered a corporate plutocracy as being the equivalent of a shopkeeper. Smith would likely concur with Noam Chomsky's view on who are the antagonists of individual liberty:

"An array of mega-corporations, often linked to one another by strategic alliances, administering a global economy which is in fact a kind of a corporate mercantilism tending toward oligopoly in most sectors, heavily reliant on state power to socialize risk and cost and to subdue recalcitrant elements."

Libertarians are ideologically committed to the belief that individual liberty is both the intrinsic and normative primary concern of a free society. It is bewildering to see the right wing of the American political spectrum, who claim to embrace the principles of liberal individualism, condone the Darwinian transformation of a system of free market capitalism—intended by Adam Smith to distribute wealth amongst hard working innovative individuals—into an economic system that marginalizes and alienates the individual from the economic process.. The American people have not abandoned capitalism: Capitalism has abandoned the American people—abetted by the politicians they elected to represent their collective and individual interests.

Posted by Michael Windle On Nov 11, 2009 at 9:49 AM

Healthcare: America's Moral Dilemma

Originally posted by R.D. Bresnahan's blog: Chaos Lyceum

In the previous blog, a case was made for the encouragement and acceptance of open and free debate concerning issues of social importance in a liberal society. The crucial outcome of expressing diverse opinions is the realization of truth. In addition to finding truth, open deliberation is instrumental in attaining a consensus or common ground amongst opposing factions. This seems to be the case in the progressively more raucous health care debate. It would appear that parties on both sides of the debate seem to agree that healthcare is a moral imperative.

Former Senator Rick Santorum stated in an interview with Greta Van Susteren that the health care issue is in fact a “moral obligation” but he also stressed that the provision of healthcare to the uninsured should not be undertaken by the government. Conservative political pundit Larry Elder also acknowledged that health care was a “moral imperative” but “not a constitutional right”. These statements which were both aired on Fox News were in response to President Obama’s recently convened conference call, on which he spoke to thousands of faith leaders about health care as a moral and ethical issue.

So it seems that there may be a vestige of common ground between what can be best described as combatants in this impassioned and vitally important American debate.

But the question remains as to how this moral obligation to provide health care to the uninsured members of the community—to be your brother’s keeper--should be best delivered.

The conservative camp contends that this ‘obligation’ is best accomplished by means of the free market economic system that is currently in place. The Obama bloc suggests that it is the responsibility of the government to make healthcare available to those who are not currently able to access affordable healthcare.

If the concept of a moral imperative is taken to mean a duty or responsibility, moreover, a social responsibility, then the arena of the private sector may be the wrong place in which to expect a solution to providing healthcare to those who cannot afford it. The champion of neoliberal economics Milton Friedman states that the doctrine of social responsibility is a "fundamentally subversive doctrine in a free society, and … that in such a society, there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." It is difficult to reconcile how the current for profit health care paradigm, operated by corporations, would be able to justify providing healthcare to citizens who cannot afford health insurance or are disqualified from acquiring insurance. It seems perplexing and paradoxical that the Christian right, who by definition embrace the concept of benevolence, condone the status quo.

Moral imperatives are often difficult to resolve in the culture of egoistic individualism that is the fundamental nature of America’s perception of liberty. Citizens are identified as autonomous, self-interested—their motivation derived from concern for their own welfare and that of their immediate family. In this view, it is extremely difficult to justify the government imposing itself, via a government operated healthcare plan, on its citizens, who value their liberty and independence with such verve. Increased taxation accompanied with the economic inefficiencies inherent in demonstrably inept government bureaucracies will not be tolerated by the public unless they are willing to abandon the liberal individualism that places such important value of the pursuit of private interest and autonomy. Unless there has been a paradigm shift in the political ideology of the American electorate, the ‘public option’ seems to be unpalatable. The incongruity here is that Obama received 52.9% of the popular vote. Was the electorate misled by Obama’s campaign rhetoric or is the population prepared to accept a move to the political centre?

Where does this leave the debate? It seems clear that the current corporate based economic paradigm is ideologically incapable of providing for those in need of healthcare since any form of benevolence is deemed to be a form of intrusive tax, ergo, an uninvited diminution of shareholders return on investment. The role of the government to supply healthcare to those in need seems to be antithetical to the American ethos—whose constituents value the notion of individual autonomy and the unfettered pursuit of self interest. If the current economic institution of corporate based capitalism and the political institution that adheres to the political philosophy of liberal individualism are incapable of providing for the downtrodden and marginalized members of society, is there another social institution that can make healthcare available to this segment of society.

David Hume stated that “no qualities are more entitled to the general good-will and approbation of mankind than benevolence and humanity, friendship and gratitude, natural affection and public spirit, or whatever proceeds from a tender sympathy with others, and a generous concern for our kind and species.” His close friend and iconic proponent of free market economics Adam Smith generally agrees:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.

Clearly it can be argued that even the most hardened individual can have empathy for his fellow man. The often cited Kaiser ABC poll on healthcare suggests that Americans are willing to help their fellow countrymen but when asked if they would you be willing to pay more—either in higher health insurance premiums or higher taxes—in order to increase the number of Americans who have health insurance, 54% to 41% were opposed. So as it stands, Americans do exhibit compassion to those in need but are not willing to part with their income or assets to accomplish this benevolent gesture. Is there another social institution that can fill this gaping requirement?

Perhaps the answer lies in non-profit organizations such as the various religious institutions and charitable foundations that have demonstrated a proclivity to offer healthcare to those in need. Unlike investor-owned organizations, which are economically driven, nonprofit health care organizations are obligated to meet society’s needs for medical education and research and to advocate for and meet the needs of the most vulnerable members of their communities. Health care, like education, is a "public good" or "social service", essential to human dignity and the pursuit of happiness. The Alliance for Advancing Non-profit Health Care cites three important aspects of healthcare:

A healthy society rests on the health of its citizens.
Health care needs differ locally and are best prioritized and addressedwithin the political, social and economic fabric of each community.
Government cannot and should not try to meet all of society’s needs,and "running things" is generally best left to the private sector.

Perhaps it is time that the economic and political institutions of American relinquish their grip on healthcare and allow regional non-profit organizations—funded through the compassion of America’s affluent citizens and institutions— to be given the opportunity to provide a service that preserves human dignity and advances the well-being of the nation. This would entail insurance companies to surrender at least part of their franchise on a very profitable aspect of their business model. Corporate healthcare PACS would not likely allow this to be undertaken without hostile resistance. Government mandarins, intent on adding to their legislative power and influence would similarly vehemently oppose relinquishing their grasp on power. America’s healthcare system is headed towards a catastrophe: if something inventive and revolutionary is not undertaken soon, the nation will find itself in a crisis that will test the resolve of every one of its citizens and institutions. Perhaps the time has come for the American people to consider Aristotle's notion of the Golden Mean and strike a balance between the pursuit of self interest, which is protected by the Constitution, and, the virtue of benevolence which is an integral attribute of an individual's conscience. This balance may, in the long term, ensure the sustainability of the community that facilitates the liberty and pursuit of happiness that is so heartily treasured. Fulfilling one's moral imperative may be requisite in guaranteeing the liberty accorded to them in their constitution.

Posted by Michael Windle On Nov 11, 2009 at 9:40 AM