Who Benefits When Money is too Cheap?

It seems to me that there is a non-trivial dependency of increasing concentration of wealth in the top 10% and the expansion of tradable contract rights such as stocks, bonds, derivatives, ETFs, futures contracts, options. Parallel with the expansion of financial opportunity in the buying and selling of such contracts has been government generated expansion in money and credit. Central banks have become expert in using fiat currencies and the provision of credit to pump liquidity into national economies. Qualitative easing has kept the OECD economies growing; China has funded much of its remarkable growth with government provided loans. There is so much liquidity in the E.U. that some instruments have negative interest rates.

Thus, when I read last Friday that the Dow Jones Industrial Average hit a record by closing above 27,000 for the first time, I was not overjoyed.

That day, the S&P 500 index climbed above 3,000 for the first time.

And this happened when, as Corrie Driebusch reported for the Wall Street Journal that “Second-quarter earnings are shaping up to be a challenge, but the stock trajectories of some companies that have already reported show that investors are forgiving. A handful of companies that reported disappointing earnings in June are now in a surprising place—their shares are near or above their levels prior to reporting results.”

My first questions was: what is driving stock prices up? Low interest rates making money cheap for those who have it?

My second question was: cui bono? – “For whose benefit?”

This was Cicero’s insight into explaining human behavior: finding out who benefits from an action will lead us to understand the cause of what happened.

Then, on Saturday, the Wall Street Journal ran a story that “prospects of a Fed rate cut propel stocks, oil prices.” So those with the means to speculate are made more wealthy by government policy.

And with low interest rates, savings – most important to the middle classes and even the poor – are discouraged. Asset accumulation is titled towards the rich.

As has long been said of financial capital: “Those that have, get.”

What is a Company Really Worth?

The Caux Round Table for Moral Capitalism, from the adoption of its ethical Principles for Business 25 years ago in 1994, accepted as necessary for good business risk management prudent responsibility for the impacts of a business on stakeholders.

Such concern implicates the future profits of a business. Good risk management of stakeholder relationships makes future profits more certain. Certainty of future earnings improves the net present value of a business.

But our financial mechanics of putting a value on a business is timeworn, placing a blindfold on owners, managers and investors, preventing them from seeing clearly the real value of a business.

We are convening round tables this year in various cities around the world to explore how valuation methodology can be modernized for the current era of sustainability.

We asked the noted research firm Oxford Analytica to prepare for us a background report on valuation methodology and current initiatives to improve it, which is available here.

I urge you to read it and let me know your thoughts on the role of valuation in today’s global capitalism.

Merit Goods

I am increasingly persuaded that the idea of “merit” goods should have a role in thinking about free markets.

The foundational moral basis for capitalism I have suggested is the willing assent of market participants to a transaction. The ethics of a transaction – a sale, a hiring – arise from mutuality, the interdependence on the parties that each has something of value to the other and that the exchange is freely entered into.

Thus, any factor which closes down the freely accepted terms of agreement – compulsion such as resulting from monopoly or monopsony, rent extraction by governments and other power imbalances, including ignorance and misrepresentation – detracts from the morality of capitalism.

Yet, what if buyers and sellers agree to do something harmful?

What if neither party cares about the negative externalities of a product? Who is to judge their ethics? God only? The state? Parents of naughty children?

The idea of a merit good creates space for freedom in markets. Merit goods and services should be sold and consumed. Unmeritorious goods and services, on the other hand, may be forced off the market or their sales regulated.

There are two recent examples of interaction between markets and unmeritorious goods:

First, the company Purdue Pharma LP is now in financial difficulty for promoting and selling Oxycontin, an opioid. Oxycontin has serious negative externalities which contributed to the opioid crisis and deaths in the U.S. The company’s revenue will drop below $1 billion this year for the first time. Employees are leaving and a potential bankruptcy filing looms.

Secondly, bullets. Bullets can be used to kill and wound people. What merit is there in that? California has passed a law requiring those who want to buy bullets for their guns to undergo a background check before they can make such purchases. Their freedom to buy has been circumscribed given the potential for harm possessed by the product they desire to have.

The law attempts to reduce the harm done by bullets by limiting their sale to those more likely to have “meritorious” intentions in shooting them.

Costs and Benefits of Meritorious Actions

A couple of weeks ago, Heather Gillers reported in the Wall Street Journal that the well-regarded California Public Employees Retirement System (CALPERS) is reconsidering its acclaimed practice of investing for social good following the theory of socially responsible investment.

CALPERS directors are keeping their ownership shares in private companies which run prisons, sell guns or have business links to Turkey (to protest that country’s lack of recognition of the Armenian persecutions 100 years ago) because of the potential for losing needed revenue with which to pay retirees or because of uncertainty about the beneficial effects of such disinvestment.

Underfunded public pension funds across the U.S., short some $4.2 trillion in assets necessary to earn enough money to pay promised pensions, are also thinking about their responsibilities.

On the one hand, they have a conflict between two different standards of merit: one is financial – earning money for beneficiaries and the second idealistic – promoting social good for third parties.

On the other hand, the micro-economic realities of marginal utility curves create their own moral imperatives. When you are flush with money, using some of it for social good does not come at a high cost. But when funds are low, the marginal utility of each additional dollar spent is high. The opportunity cost of not spending it on something else is significant. How, then, should your seeking to do good be balanced against using the dollar prudently to increase your assets?

When is the accumulation of assets for those who depend on them a higher social good?

CALPERS Chief Executive Marcie Frost said “With a targeted return of 7%, we need access to all potential investments across all asset classes. Divesting does the exact opposite – it shrinks the investment universe.”

Just as they teach in Economics 101: you can’t have it all; there is no free lunch; everything comes at a cost; choices must be made.

Elite Expertise?

A recent article in the Atlantic was reassuring to me. It provided confidence that general wisdom – the kind provided by ethics and principles – can be more reliable than professional expertise in guiding our decision-making. Consider Boeing’s reliance on exquisite software to overcome a design problem with the large engines used in its 737 Max8 aircraft.

Philip Tetlock did a study of the reliability of expert predictions. Over 20 years at work, he gathered from experts 82,361 probability estimates about the future.

The experts were, by and large, very bad forecasters.

When they declared an event was impossible, in 15% of the cases, it happened. When they declared an event was certain to happen, in over 25% of the cases, it did not.

Later studies came up with similar results. There is a cost to focusing too narrowly when it comes to thinking about the future.

Importantly, a sub-group of scholars did better in predicting those events that did happen. They were not vested in a single discipline. They integrated conflicting views. They had personalities which made them effective collaborators. They were curious about everything. They viewed teammates as sources of new knowledge, not as rivals to be convinced.

When outcomes differed from what they had expected, these generalists adjusted their thinking, while more narrowly specialized experts barely budged from their established views. The best forecasters viewed their ideas as hypotheses in need of testing.

Harvard – Elitist Egalitarianism?

Recently, Professor Rakesh Khurana, the Dean of Harvard College and a teacher of business and sociology, came out against what he calls “Capitalism.” The system he described in his Class Day speech to 2019 Harvard College graduates is a regressive hierarchy of unjust privilege which channels success to those who were “to the manor born.”

As a graduate of Harvard College, I feel no qualms in contesting his version of reality. After all, in my day at Harvard, we were taught to question and to think for ourselves.

If Dean Khurana is correct, then any thought of a “moral” capitalism is a foolish whim. What is needed for social justice is only enforced equality of money, power, status and, perhaps, happiness. No one deserves to be different, especially if the difference seems to be “better” than the norm. Dean Khurana is not the first to seek leveling in society, culture, politics and the economy. There has been a school in the West advocating regimented sameness for several centuries now.

Such terminal equivalence was the hue and cry of Gracchus Babeuf in the French Revolution. He proclaimed: “Society must be made to operate in such a way that it eradicates once and for all the desire of a man to become richer, or wiser, or more powerful than others.”

The manifesto of his movement – The Conspiracy of Equals – demanded: “Let there no longer be any difference between people than that of age and sex. … Since all have the same faculties and the same needs, let there then be for them but one education, but one nourishment. They are satisfied with one sun and one air for all: why then would the same portion and the same quality of food not suffice for each of them? … Open your eyes and your hearts to the fullness of happiness: recognize and proclaim with us the REPUBLIC OF EQUALS.

The Japanese have a saying: “The nail which sticks up is pounded down.”

In this vein of social analysis, Dean Khurana proposed to “interrogate” in his remarks what it means to deserve something, whether being at Harvard or being successful in life. The “capitalist ethos,” according to Mr. Khurana, tells us that “We deserve to win because of our skill, our hard work and our contributions.” In Monopoly, the board game which Mr. Khurana called synonymous with the capitalist system, it’s the roll of the dice that determines “whether we land on Park Place or land in jail.”

Monopoly is like real life, he concluded, which is often determined by factors beyond our control—above all by “those privileges sociologists call ‘structural inequities.’”

When I was at Harvard, the “life is only a game” theory was used by Professor Timothy Leary as justification for taking LSD and dropping out into chemically induced blissfulness.

Dean Khurana proposed we should stop thinking in terms of individual effort, merit and moral character. He said it’s time to stop using words like “deserve” and “deserving” because they don’t account for the “systemic inequities” that play such large roles in our accomplishments. Harvard, he announced, has made progress in “acknowledging and naming the privilege” that makes the language of “deserving” so “insidious.”

Khurana also urged listeners to junk the myth of the self-made person. He told his audience to focus instead on recognizing the “increasingly dynastic transmission of political, social and economic privilege governing” life in the U.S. and to work toward a sustainable, equitable society.

So, asking people to try, to learn, to work, to stretch themselves when in discomfort, to put up with others, to listen to the better angels of their natures, to be responsible and thus energize their minds, hearts and souls to do better is “insidious?” Hogwash.

Aristotle proposed that each of us individually should set before ourselves the goal or end in life of “eudemonia” – or happy flourishing. No one, no dean of a college, no social order, can give this state to us. It is up to us to give it to ourselves. That is why a concept such as “virtue,” which is personal, only comes into play as a guide to living well.

In the Greek, “eudemonia” breaks down into two ideas – “eu” or good and “daimon” or spirit. The observation about eudemonia is that we need a spirit guiding us which knows the good when that spirit is personal to us and not a collective mission imposed on us for the good of others, using us as a means for their ends.

Khurana then accused capitalism of fostering a “zero-sum” mentality. In what reality is he living? I know that as a tenured professor, he can’t be fired and his salary is secure. He lives off rent extraction secured by Harvard’s reputation in the marketplace for higher education. That reputation gives Harvard structured power and Mr. Khurana is a beneficiary of that power. Under the law of the land according to his contract of employment, he has a “zero-sum” position vis-à-vis the rest of us.

But why is he in such a prestigious position, authorized to instruct students on the “correct” way of thinking about capitalism and life? Does he, himself, deserve to be Dean of Harvard College? Apparently, some at Harvard think so.

How in a market reality, though, can a seller impose upon a buyer the purchase of a good or service? Both need to benefit according to their respective utility curves from the exchange. Economics and growth depend on mutuality, on interdependency, as Adam Smith realized. Harvard profits because students and their parents believe it provides utility leading towards success in life and pay the tuition charged.

What if Dean Khurana were to be paid by piecework, a cash fee from each student who decided to attend one of his classes? Would he not then quickly come to see some reciprocity of benefit, some ethical force at work in capitalism?

Will sellers try to cheat? Will buyers seek to push the offered price down or buy the same good elsewhere for a lower price? Will owners try to hire workers at a lower wage with fewer benefits? Will workers take advantage of employers when possible? Are people, as a rule, prone to ignoring their moral sense and abusing power? Yes.

Lord Acton was not the only one to observe this when he affirmed that “Power tends to corrupt and absolute power corrupts absolutely.” That is why we have legislated constitutional restraints on political leaders and protect private property from exploitation from others by the rules of law and the maxims of equity.

The only way to realize Khurana’s heaven on earth of absolute equality is to give some power over others to make them the same in mind, heart, soul, will, intelligence, aesthetic preferences, effort and money. Those with the power will not find the concept of “deserving” to be insidious at all. They will specify what it means to be deserving and then the rest of us must obey their tastes. That would be the structured inequality needed to ensure structured equality. Seems incoherent to me.

The idea of enforced equality ended up with Pol Pot and his Khmer Rouge followers. Seeking Babeuf’s utopia, as championed by French educated Khmer Rouge leader Khieu Sampan, everyone in Cambodia who was not “hammered” to death one way or another was pounded down under the Khmer Rouge revolutionary regime, even their own cadres who fell out of line.

Uber – An Example of Private Market Capitalism at its Best?

Uber’s Path of Destruction – American Affairs Journal

According to today’s Wall Street Journal, share prices of Uber and Lyft stock have not recovered to the level of their offering prices.

One reason may be that some more perspicacious valuations of the companies are in the minds of some investors.

The commentary here on Uber’s business model provides insight into how to value the company’s financial prospects.

The reality of Uber may prove the wisdom of the old sayings “If wishes were horses, beggars would ride” and “If to do were as easy as to know what were good to do, chapels had been churches and poor men’s cottages princes’ palaces.”

There is something in the human heart which is prone to speculation; not the prospect of reward only, but hubris of besting fortune or just “irrational exuberance.” Financial markets, as John Maynard Keynes told us in the 1930’s, in large part, feed the need of betting on outcomes for the wise and the foolish alike.

Can the West find the Middle Path?

As I reported to you a few days ago, last week, I spoke at the 2019 annual meeting of the Fondazione Centesimus Annus Pro Pontifice at the Vatican. My assignment was to consider “The West” and “The East” in relation to the call of Pope Francis in his Laudato Si’ encyclical for an “integrated” ecology of time and space in our world today, inclusive of the environment and humanity’s various strivings forward.

To attempt this consideration, I superficially postulated one essence for “The West” and another for “The East” and sought to contrast them. For “The West,” I highlighted “rationality” as the axial principle of its endeavors and for “The East,” I took the flexibility of the Doctrine of the Mean, the Tao Te Jing and the Yi Jing texts from China, along with the middle way of Buddhism and the naturalism of Shinto in Japan. “The East,” I postulated, rested its understandings on following a mean, a middle way among more extreme and rigid alternatives, while “The West” found comfort in absolutes discovered by rationality, as in mathematics, geometry, calculus, science and syllogistic logic. Descartes told us that “cogito ergo sum” – “I am because I think.” For “The West,” reality was forced into compartmentalized concepts devised by the human mind, while for “The East,” the human mind adjusted itself more flexibly to reality.

My point was to suggest that the left-brain formalism of “The West” should be counter-balanced by the intuitive, right-brain perceptions of “The East.”

I added that the time to do this was now, as “The West” has become post-modern after Nietzsche, who intuited that rationality did not lead to truth but to many truths, all socially-constructed, a permanent condition of nihilism in which the peoples of the U.S., U.K. and E.U. now twist and turn looking for meaning and solace.

A friend, Adrian Pabst, from the U.K. and Reader in Politics at the University of Kent, a leading thinker in the “blue labour” movement and co-author of The Politics of Virtue: Post-Liberalism and the Human Future, came up to me and said I had got Nietzsche wrong. It was better, he suggested, to understand Nietzsche as calling for mediation between rationality and intuition, rather than choosing one exclusively over the other.

“A good point,” I replied.

Then, I caught myself thinking: “What is the Western basis for mediation among big ideas, equivalent to Yin/Yang analysis in China or the Noble Eightfold Way in Buddhism? I sensed we in “The West” don’t have a particularly strong philosophical and cultural tradition of mediation. Aristotle proposed one in his Nichomean Ethics but we seem over the centuries to have preferred winners and losers, rather than compromisers.

So, I looked up on the internet the root words for “mediate.” What I found I want to report to you.

First, “mediate” goes back to the Latin for middle – “medi.” It also comes from a root “medere” – “to cut in half.”

Then, I found a commentary from the Center for Hellenic Studies at Harvard University which linked the root “med” to “govern,” ” think,” “care for,” “measure.”

These words imply arrangement of disparate pieces into some relationship or order, of accepting reality and responding to it.

“Med” is also linked to moderation and to the Greek “medeor” (Latin “medeo”) – to care for, or medical, medicine.

Imagine: to “mediate” might be analogized to providing care for something ill and unhealthy, making it better and more sustainable.

Well-being would be associated with moderation, not extremes and absolutes. The Greek poet Hesiod had advised us: ”Observe due measure; moderation is best in all things.”

In ancient Greek, Zeus was called the “Medeon” – the “moderator.” A “medeon,” one who knows the middle, could restore order and well-being. Such a mediator was chief by virtue of a skill, not by virtue of position or the law.

And the root “med” supports the word “meditate” – to reflect on what is.

Thus, perhaps, if we in “The West” would do more “mediation,” we could more quickly come to nourishing and sustaining balance and equilibrium in our approach to civilization.

I have suggested here and there that the function of CSR in capitalism is to mediate for a firm with all its stakeholders. Corporate social responsibility is, therefore, a process of continual mediation and business leaders should study mediation skills.

Mediation should start with discernment – approach what is with open-mindedness and humility. A company should always be aware of the situations of its stakeholders.

We have a short paper for enhancing our facility for reflection, which might be of interest to you. You can read it here.