Blog

I have been in Bangkok working with our fellows, former foreign minister Kasit Piromya and Venerable Anil Sakya, on how best to bring wider attention in our time to the teachings of the Buddha on the middle way, with humility seeking balance and equilibrium.  In an awful way, the Hamas attacks on Israeli civilians exposed the need for all of us to work to put in place solid foundations for civilization, with justice for all.

The Hamas attacks bring into question the futility of an effort like that of the Caux Round Table for Moral Capitalism to encourage action founded on moral principle.

As one who fought a war and afterwards delivered refuge to those under oppression, I have experienced the challenge of keeping our moral aspirations strong in the midst of degradation of the human into the sub-human.

I have just read the following letter from the president of the Carnegie Council for Ethics in International Affairs, which speaks to the mission of the Caux Round Table and to its importance:

The cruelty of the Hamas attacks on Israel is a shocking expression of hate and depravity, pure and simple.  We watch in horror and disbelief at this latest and most tragic example of man’s inhumanity to man.

It is vital that we stand with these victims and the people of Israel as witnesses to their pain and suffering.  And it is equally important that we condemn those who perpetrated these crimes against humanity – so intentionally, willfully and without mercy.

There can be no justification for the intentional killing of innocent civilians, hostage-taking and the imprisonment of women, children and elderly with the threat of public execution.  Any qualification – “yes but,” ‘on the other hand,” “at the same time” – is a hollow attempt at moral equivalence and an evasion of responsibility.

If the line is as clear as I suggest, then what are we to make of such a complete rout of ethical principles? 

Civilization rests on a convergence of reason and experience that yields principles such as individual accountability, the prohibition of torture and the duty to protect innocent bystanders. It is in the breach – precisely in moments such as this one – that commitment to these principles must be re-affirmed loudly, proudly and without reservation.

In 2016, Carnegie Council was visited by Gen. Moshe Yaalon, former Israeli Defense Force (IDF) chief of staff and Professor Michael Walzer, author of Just and Unjust Wars.  When asked about security threats facing Israel, Yaalon said: “Military excellence has handed us an advantage on the battlefield, but this edge can only be maintained if we preserve our ethical superiority.  And as the war on terror develops and intensifies, so must our determination to deliver an unequivocal moral response to the challenges it brings.”

Nations are communities based on values.  Hamas has revealed its values and Israel is now being tested in its response.  As Yaalon’s comments suggest, IDF leadership knows that military success alone will not be sufficient, as a moral response requires recognition of the rights of all – including Palestinians – and the pursuit of a just peace.

In his talk, Yaalon invoked the journalist Moshe Beilinson who wrote a 1936 editorial titled “Until When?” As violence flared in pre-state Israel, Beilinson asked: “Until when will we have to live by our sword?  Until when will we have to fight for our existence?”

The answer remains elusive and it lingers for Israelis and Palestinians alike.

Especially in this horrific moment engulfed in the fog of war, we cannot lose sight of the fact that mutual recognition and respect should be the determined goal for all of us who believe that a better future is possible.

We get there by reaffirming the equal moral worth of every human being, the duty to protect the innocent and a commitment to empathy as a matter of both morality and enlightened self-interest.  Those who commit to these principles will have the advantage of moral clarity in a time of turmoil and tragedy.

In the dark days ahead, let us hope these ethical principles will light the way.

Joel Rosenthal 
President 
Carnegie Council for Ethics in International Affairs

Asset valuation, not profit, is the heart and soul of free market capitalism.

Short-term profit is just a waystation on the journey to create wealth.

The precise goal for making a profit is not taking in money, but making a “net” profit – money which is yours, which you can keep as an asset and add to your capital.  One can take in cash – “make a profit off sales” – but at the end of the accounting period, still end up worse off as total expenses were more than the gross profits earned.

Coming out ahead in the profit and loss statement demands good judgment about contingencies and risks.  It presumes hard-headed calculations of stakeholder circumstances.  First, is your product or service something that somebody wants to buy?  Secondly, will they pay you enough to cover your costs and leave you with a net profit?  Thirdly, will your calculated costs include taking appropriate care of your employees, investors and enhancing or at least protecting your brand appeal?

Then too, the capital value of your firm depends most on expected future net profits.  Making money today, but losing your market next week, is not the road to success in business.

Valuation analysis is the calculation of what “asset” value your firm now has in its expected ability to earn profits in the future.  Roughly speaking, valuation analysis speculatively estimates what your future profits will be and what risks are associated with that expectation. If your present expectations are subject to unpredictable future events, your realistic estimated value is low. You may dream about a rich and glorious future and your dreamy, unrealistic, expectations may come true, but most likely they will not.

In the U.S., a recent judicial opinion on the realism of Donald Trump’s past evaluations of his “assets” exposes the uncertainties of valuation analysis.

What was Trump’s ownership worth in present dollars?  How much would you pay to buy his business “empire” and use it to generate future income for yourself?

In an opinion of September 26, 2023, Judge Arthur Engoron of the Supreme Court of the County of New York, State of New York, harshly criticized the Statements of Financial Condition (SFC) filed on behalf of Donald Trump as false and misleading.

The judge came to this conclusion in the belief that valuation of asset values is a reliable assessment of objective reality.  That belief may well be an illusion.  Value, being an intangible personal preference, varies from person to person.  Some like it hot.  Others like it cold.  “Beauty is in the eye of the beholder.”  “One person’s trash is another’s treasure.”  De gustibus non est disputandum – “One can’t logically prove that one person’s taste is better than another’s.”

Preferences or, as economists call them, “supply and demand curves” and “utility curves,” come in many formats.  Price in money, as a measure of value, will be different for different sellers and buyers depending on the slopes of their utility curves.  I might sell low, but you might hold out to await a different buyer who has a different demand curve and will pay more for the same good or service.  I may need the money now, while you can afford to wait and try your luck.

An objective reality about value only comes into being in a transaction.  When the seller and the buyer have a meeting of minds about price, then that price is a social fact, a non-subjective number.  Yet, what those two people agree to as correct monetary value to place on the good or service may not be acceptable to others.

Valuation methodology, therefore, must be made to happen in an ecosystem of uncertainty.

Valuation is an approximation, a guestimate, of what an average person, one with an expert opinion or just a reasonable person, might think is a correct judgment as to worth.

Actually, the SFC filed on behalf of Donald Trump affirm the obvious.  They contain the following warning to those who will rely on the statements:

Assets are stated at their estimated current values and liabilities at their estimated current amounts using various valuation methods.  Such valuation methods include, but are not limited to the use of appraisals, capitalization of anticipated earnings, recent sales and offers and estimates of current values as determined by Mr. Trump in conjunction with his associates and in some instances, outside professionals.  Considerable judgment is necessary to interpret market data and develop the related estimates of current value.  Accordingly, the estimates presented herein are not necessarily indicative of the amount that could be realized upon the disposition of the assets or payment of the related liabilities.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated current value amounts.

In other words, Trump’s valuation experts disclose that their work is open to second-guessing, that it is not “true” like a statement of an uncontested fact, which would be either “true” or “false.”

Valuation paints a picture.  It is not photography.  And as an artistic construct, an SFC is more impressionist than scrupulous in its attention to every small detail or possible contingency.

But there are limits.  The range of reasonableness can have some scope, but not everything that might be said about the ‘value’ of something can be unquestionably reasonable or fully trustworthy.  You can’t treat a valuation opinion as actual money in your hand.  Valuation, to be useful in capitalism, needs standards of due care, credibility and integrity to bring it as close to money as possible.

Then again, to be realistic, what is the value of money?  Is it as good as gold?  Even the price of gold goes up and down.  How well will your dollar bills hold their market value?

Here is a chart on the real value of a dollar over time:

Supply and demand still do drive values.  Spanish police arrested 12 people suspected of stealing 74 tons of olives in the Spanish province of Seville, mere weeks after 6,000 liters of olive oil was stolen in Malaga.  Heatwaves and drought ruined this year’s harvest in Spain, the world’s largest producer.  As a consequence, the price of olive oil at origin has risen 112% since last year.

The purpose of valuation is to facilitate and encourage transactions which produce wealth and increase satisfactions, to reduce risk of failure and imbalance between the parties to a transaction and to promote trust in society and the economy.

Valuations which are unreasonable, though not intentionally fraudulent, are still dysfunctional. They should not be facilitated or accepted.

Judge Engoron, in finding some of the SFCs filed on behalf of Donald Trump to have been unreasonable, beyond the pale of sensible practice and so without sufficient integrity for a fair and transparent capitalism, pointed out details which were in-credible.

For example, from 2012 to 2016, Trump submitted SFCs claiming that his residence in Trump Tower, New York City, was 30,000 square feet in area when, in fact it only had 10,996 square feet.  Use of the larger number led to a calculation of total value which was overstated by some $114-207 million dollars.

Similarly, when the highest sale price for an apartment in New York City was $88 million, Trump’s SFCs reported the value of his property at from $180 million to $327 million during the years 2012-2016.

Now, to be fair to Trump and his valuation specialists, it is within the bounds of cosmic possibility that some buyer might pay those higher prices or close to them for the apartment for who knows what motivation.  But it is not within the bounds of reasonable probability that such a sale would ever be closed in Trump’s lifetime.

Trumps’s SFCs for the years 2011 through 2021 listed the Trump Park Avenue building as one of his assets.  In that building were unsold condominium units.  A number of these units were limited by New York City’s rent control laws in the amount of rent they could charge to tenants.  One valuation appraisal of those units with limited profit potential estimated a value of $62,500 for each such unit.  In Trump’s SFCs, the value of those units was much, much higher, a capitalized value of future income which would never be realized as long as the rent control laws were in force.

Trump’s renown club property in Florida – Mar-a-Lago – was assessed by the local property tax collector as worth between $18 million and $27.6 million between the years 2011 and 2021 as the capital value to be taxed at the legal rate.  In those years, Trump’s SFCs valued the property at between $426,529,614 and $612, 110,496.

The judge relied on a previous court ruling that “[where] the expert’s ultimate assertions are speculative or unsupported by any evidentiary foundation, however, the opinion should be given no probative force …”  In other words, the expert’s opinion is pure hokey or delusional from the viewpoint of the law.  From the law’s perspective, there is no expertise to support such a statement as to market value.  The supposed expert is just telling tall tales to entertain some audience.

Judge Engoron then focused on other not credible conclusions as to the value of Trump’s assets. The lack of credibility which he objected to arose not from theory but from factual discrepancies between legal rights and assumptions as to the value of those rights in the future, the assumptions being not logically supported by the limited nature of the rights owned.

With respect to several golf clubs, Trump had agreed to assume an obligation to pay refundable membership deposits. But his SFC’s from 2012 until 2021 valued that liability at $0 when in fact it was a liability in the millions of dollars.

Another discrepancy attached to Trump’s 30% limited partnership interest in a realty trust which owned office buildings in New York City.  The terms of his limited interest in the trust prevent his use or withdrawal of funds held by the trust.  Trump’s SFCs, however, classified his 30% limited interest as a “liquid/cash asset.”  The judge concluded that it was false and misleading for Trump to indicate that he had access to between $14 some million and $93 some million in liquid assets when he did not.

Trump used the valuation statements for his advantage.  Having property with high valuations is a strategic advantage in capitalism.  You can borrow more and put those funds to work on your behalf and people will credit you with achievement, which reputation can be turned to your practical advantage.  Valuations have consequences that drive market transactions.

A big conceptual mistake which many smart people have made over the last 260 years is to conflate money with capitalism and capitalism with money, to misperceive that they are two sides of the same coin, joined back-to-back 360 degrees in the round and so conjoined like Siamese twins.

Money and its more generic category of economic dynamism – financial liquidity – are part and parcel not only of capitalism, but of all human socialized economic systems.

Ancient societies had money.  Feudal aristocrats used money and got into debt.  Stalin’s classic communist regime had currency.  None of these systems was capitalist.

Inflation – when money loses its value – is pernicious in its effects on social equality.  Under conditions of inflation, the rich get richer more easily and the middle class and the poor see their purchasing power decline.

But is inflation – the creation of too much money – inherent in capitalism?  No.

Rather, inflation and its opposite – deflation – turns capitalism away from fulfilling its promise to optimize wealth creation for all of a society.

Here is a chart on the declining real value of the U.S. dollar:

In what sense was American capitalism responsible for this?

Real median American household income after taxes fell 8.8% to $64,240 from 2021 to 2022 and the poverty rate after taxes, as measured by the Supplemental Poverty Measure (SPM), increased 59% to 12.4%.

In the U.S., from 2021 through mid-2023, prices have increased more than wages.

Here is a chart on growing inequality between the rich and the poor:

In the U.S., the share of national income going to those who provide labor, not capital, has been declining, exacerbating the effects of inflation on real wealth creation for most Americans.

How Inflation Eats Away at the Promise of Capitalism

Inflation works through money and other forms of liquidity.  As the supply of money/liquidity grows, the value of each unit of money/liquidity is worth less and less.  Simple supply and demand.  If ten dollars are in circulation, each dollar is worth 10% of the total pie.  If one hundred dollars are in circulation, each dollar is worth only 1% of that pie.

Now, under conditions of inflation, the poor and middle classes have limited opportunity to increase their incomes.  Most of what they earn, they spend.  They don’t have enough to save.  As prices rise in money terms – one ear of corn costs more in currency than it did – the poor and the middle classes must reduce consumption.

For the rich, it is different.  As Hemingway once retorted, “They have more money.”

They have enough to spend and to save.  As they save, they benefit from rising interest rates, which usually accompany inflation.  Their savings mostly go into financial markets, where they earn money on money.

The important point is that the private sector and markets do not create currency and other forms of money.  They do pass some of their money around as loans, but they don’t manufacture paper dollars or metal coins.  That is illegal.

While inside the capitalism system of private sector economic activity, thought financial institutions trade in money and liquidity.  The production of money is a government function.  The manipulation of interest rates and loan opportunities in the private sector is also a government function in a modern market economy.

So, where inflation is concerned, government can act at variance with social justice ideals.  The same is true when government policies in contracting the money supply can result in a recession or depression.

Now as money/liquidity circulates in an economy, it tends to flow from consumers to producers and sellers of goods and services.  Thus, those who are in business and finance gain a disproportionate share of the money/liquidity in circulation.  Those who have assets see the nominal value of those assets rise with the growth of money/liquidity.  They can borrow against those assets and thus, grab hold of more money with which to invest.

The Wall Street Journal just reported that interest rates on 30-year bonds issued by the U.S. government rose to 4.55%, the highest rate since 2011.  The yield on 10-year debt obligations of the U.S. government is now 4.479%, the highest rate since 2007.

We can ask with the Roman Judge Lucius Cassius: “Cui bono?” – “Who benefits?”
Not poor inner-city families living in subsidized apartments and on welfare.  Not the middle class paying more for gasoline with declining real incomes.

The total debt to be paid by the U.S. government is now $33 trillion.

That is a lot of liquidity sloshing around.  The bigger the government debt and the higher the interest rate, the more cash the government must come up with to pay interest and then retire the principal.  The payment obligations increase the government’s annual budget.  Since tax revenues are not enough to pay all of such budget increases, the government will run deficits – government money going out as expenditures to fuel more inflation – with more debt accumulating for higher outlays down the road.  A doom loop?

And private sector capitalism is responsible for this?

Inflation is not the only way in which money can cause disequilibrium in capitalism, interfering with its ability to optimize the production of both private and public goods.  Both debt and asset bubbles, which frequently are interlocking, divert capitalism into misapplication of investment and misuse of wealth.  Too much debt – too much borrowed cash in hand – coupled with too little prospect of repayment, leads to enterprise collapse or personal loss of assets.

Too much money, often borrowed, spent on assets with the hope (often illusory – “irrational exuberance”) of appreciation in asset value in the minds of potential purchasers raises the market price of assets above what long-term demand will support.  At some point, short-term demand evaporates, as long-term demand sets market prices.

My alumni magazine from Harvard University came recently.  By chance, it included two short articles, each of which supported the conclusion that we human persons have a moral sense, whether we want to or not.

The first article reports that Harvard professor of biological anthropology, Joseph Henrich, argues that human intellectual brilliance emerged from generations of sharing information in communities and networks.  We humans, he says, are uniquely able to engage in collective information processing.

We can do this because we are moral creatures.  Aristotle made this point centuries ago, calling us zoon politikon – creatures driven by social and political needs for association and mutual understanding.

The threefold expansion of the size of our brains over the last two million years was driven, Professor Henrich says, by the need to acquire, store and organize cultural information.  From this, he concludes that societies which best capture and transmit inherited culture enjoy greater success.  Successful cultures facilitated specialization and intergenerational transfer of intelligence and skills.

Specialization, with its creation of a demand for cooperation and intergenerational interdependencies, depend on morality in the mind of individuals, tied together by those relationships and reciprocal responsibilities.

The second article reported on research identifying who are the best team players.  Professor David Deming at the Kennedy School ran simulations of team collaboration looking for clues as to who most enable success for the team.  A measure of teammate strength was developed to generate data for analysis.  The data led to identification of those better at teamwork.  Then, the researchers looked for traits those more proficient teammates had in common.

The most interesting commonality was a high score in the Reading the Mind in the Eyes Test (RMET).  This is a test for social intelligence developed to test for autism and Asperger’s.  The subject is shown photographs of human eyes and is asked to identify the emotions revealed by those eyes.  Being able to correctly infer another’s emotions just from looking at their eyes is a skill that leads to excellence in working with others in a team.

But that skill, in turn, is made possible by a mind that has moral awareness of others and of emotions.

The most common and universal skepticism about the possibility of a moral capitalism is that people can’t be trusted to be responsible for others that, as Herbert Spencer and other social Darwinists believe, we human persons are thoroughgoing egoists without any moral sense or at least with only very intimidated ones.

If, on the other hand, we are each born capable of developing a robust moral sense, as Adam Smith believed, then moral capitalism is a very practical alternative economic system.