Vatican Conference on Responsible Economics

Last Friday and Saturday, I attended the annual conference at the Vatican of the Fondazione Centesimus Annus Pro Pontifice, of which I am a member and I also serve on its Advisory Council with our Chairman emeritus Lord Daniel Brennan. The Fondazione was established by Saint John Paul II as a lay organization reporting to the Pope for the advocacy of Catholic Social Teachings in business and finance. Our topic for consideration was the encyclical Laudato Si’ of Pope Francis.

In speaking to us on Saturday morning, Pope Francis importantly said:

“At the same time, however, a number of challenges and issues still remain. For example, progress on the achievement of the Sustainable Development Goals has in some cases been slow and even non-existent, or, sadly, has regressed. Improper use of natural resources and models of development that are not inclusive and sustainable continue to have negative effects on poverty, social growth and social equality (cf. Laudato Si’, 43, 48). Laudato Si’ is not a “green” encyclical: it is a social encyclical. Don’t forget this. Moreover, the common good is placed in jeopardy by attitudes of unbridled individualism, consumption and wastefulness. All this makes it difficult to promote economic, environmental and social solidarity and sustainability within a more humane economy which considers not only the satisfaction of immediate desires but also the welfare of future generations. Faced with the enormity of such challenges, it would be easy to lose heart, giving in to uncertainty and anxiety. Yet, human beings, while capable of the worst, are also capable of rising above themselves, choosing again what is good, and making a new start” (ibid., 205).

On a personal note, when teaching in Bangkok these past several years, I have been working with Ven. Anil Sakya, a descendant of Ananda, the cousin and first disciple of the Buddha. Ven. Anil has proposed understandings of the Buddha’s first sermon which consider the Dharma as a guide to sustainability in our modern terms of living wisely. Ven. Anil and I are editing a book of essays on this convergence of moral thought.

I thought it helpful to have him invited to this year’s annual meeting of the Fondazione to exchange views with experts on similar understandings coming from Catholic Social Teachings.

I was, accordingly, very pleased that he was invited. Here is a picture of Ven. Anil meeting Pope Francis:

Would that mutuality and reciprocity among all faiths, wisdom traditions and political philosophies were so congenial.

Three Recent Developments of Interest

With respect to our Principles for Business, I noticed three recent developments of interest at three major global corporations:

1) In its first quarter since putting its shares on the public market, Uber has lost $1 billion. How do you value such a company?

2) The U.S. Department of Justice has taken preliminary steps towards reviewing the business model of Google for being too large in violation of anti-trust laws. We raised such a concern over a year ago in one of our commentaries.

3) The fatal flaws in the software used to correct the angle of ascent in Boeing’s 737 Max 8 aircraft arose from lack of communications and sharing of information among units in Boeing’s bureaucracy. We have noted the “friction” – a notion borrowed from Clausewitz – which inevitably arises in large bureaucracies and often leads to failures of corporate social responsibility, BP and General Motors being notorious previous examples.

Values Make History

This week is the 75th anniversary of the Allied landing in Normandy, France and the 30th anniversary of the repression of the Tiananmen manifestation in China. Both events teach us the same lesson: at the root of human behavior are values.

Yes, interests also drive our actions but interests are values too. What we prefer is of value to us. More importantly, when national politics and war are concerned, the value of legitimacy takes on special importance: is it legitimate for us to follow our interest, to defend it against others, to enjoy it?

On what grounds are our interests so deserving that we can seek them even at the expense of others? That is a question of right and wrong, the ethics of living in community with others. What is right is legitimate. Legitimacy reveals what is within our right to do. Legitimacy is about core values.

For the Allies in World War II, the German Reich was an aggressor and military action against it was legitimate, so legitimate that the great expense in blood and treasure necessary to defeat that German government and its army was easily accepted as very worthwhile.

In the case of aggressive war, international law is accepted by nations as the test of legitimacy. What international law will sanction is legitimate and cannot be opposed with force. Aggressive war was outlawed by the 1928 Kellogg-Briand Pact.

The bloodshed in Tiananmen Square in 1989 came as a result of political conflict among Chinese over the legitimacy of the state. Protestors and the Chinese Communist Party leaders did not agree on the terms of legitimacy for a government in China. The Party believed its values should govern Chinese; the protestors wanted the Chinese state to be legitimated by some open political process and not imposed by the Party alone. It was a conflict of values.

The question we are left with is: what right does violence have in creating legitimacy for values?

The Greek historian Thucydides recorded an Athenian perspective on this: “The strong do what they will; the weak what they must.”

I align with the Allies of World War II and those gathered in Tiananmen Square: legitimacy imposed by violence has no claim to our allegiance. We must insist, even to the point of violence, on the rule of law and ethics as the basis for state power.

In my legal history course, we read the exhortation of Henry de Bracton in his commentaries on English law of 1235: “Not under man but under God and the law.”

What is a Company Really Worth to Society?

Stock market prices are often taken as the gospel truth, until they are not. Today’s price of any stock – bought through a stock exchange, over-the-counter or in a private sale – bears no necessary correlation to the stock’s price tomorrow or two weeks from now.

So why have we built a mighty fortress of global finance on possible falsehoods? The first asset bubble and crash of stock valuations was the tulip mania of 1637, right at the start of capitalism in its birthplace in Holland. Our market valuations are no more “true” today, nearly 400 years later.

Just ask those who bought the stock of Uber or Lyft when those companies listed their shares for public trading. The initial offering price immediately dropped as the market followed the preferences of buyers.

The May 28th edition of the Wall Street Journal carried a story that the price volatility of stocks has become such that judiciously picking individual stocks will bring more profit than “throwing money into index-tracking funds.” Stock pickers make their own valuations of shares company by company, competing to be more perspicacious about future prices than other market buyers and sellers.

After the collapse of credit markets in 2008, I was educated in price theory by Suppiah Dhanabalan, then Chairman of DBS Bank in Singapore. Reflecting on the bubble and collapse of prices on securities tied to American sub-prime mortgages, Dhana said “prices are only nominal.”

Nominal – in name only; in appearance but not in essence.

So, to some extent, the essence of financial markets is speculation on appearances, on what others think is the “right” price. And as we have seen since 1637, people have different ideas about what the “right” price of a stock should be. The fact that a market reflects one price today has no bearing on what people will think the “right” price of that security will be in the future.

Consider: what is the right price for a share of Tesla stock?

On May 24th, Tesla stock closed at $190.63, down 42% for 2019, a loss of $30 billion in market value. Tesla’s shares now have a negative return over the past 5 years. Two analysts predicted the stock would fall lower, to $36 per share.

The reality of Tesla is that it has spent $10 billion since 2011 on running its operations and has only made a profit in 4 quarters. It has funded its going concern costs with infusions of capital from trusting investors. What will happen to its share price when investors no longer believe that the company will be profitable someday?

Consider Uber. The company raised $8.6 billion between December 2015 and October 2018 at an average cost to investors of $48.77 a share. Uber shares now trade about $40 a share.

Other companies which went public but now see their stock trading at prices lower than what investors paid in private placements before the public listings are Snap, Dropbox and business software maker Cloudera.

Lyft’s stock price is higher than what early investors paid in private offerings but it is down 19% from its March 2019 public offering.

Why the gap between hope and reality?

With Uber and Lyft, “There is no profitability within sight even with binoculars and that’s been a tough pill for investors to swallow,” said Daniel Ives with Wedbush Securities. “It’s a totally different ballgame trying to get public investors around the valuations,” he added.

Uber lost $3.7 billion in the 12 months through March.

Since 2014, startups Tencent Music, Meituan Dianping, iQIYI, Sea, Pinduoduo, Uber, Snap, WeWork, Lyft, Spotify, Pinterest and Dropbox have cumulatively lost nearly $47 billion.

In the San Francisco Bay Area, there are 88 startups each valued at more than $1 billion.

The Economist magazine looked at the financials of 10 such highly priced startups, finding that while their sales have doubled since 2017, operating margins average a minus 30%. So, the more they sell, the more they lose.

How do you put a “true” value on such companies?

If we can’t accurately price a company, how then can it be managed for optimal advantage to its owners, customers, employees and society?

Shouldn’t We Align the Norms of Capitalism with the “Better Angels” of Our Human Nature?

Over the Memorial Day weekend here in the U.S., I read over a book of some past distinction which I had long overlooked. It is Karl Polanyi’s The Great Transformation. Writing in the middle of World War II, Polanyi credits market capitalism with changing human civilization through economic growth but at a cost which he considered to be too high.

His thesis, not unlike that of modern business ethicists from Kantian, Christian and socialist standpoints, is that the new, transforming, capitalist economy was divorced from society and humane values. He wrote: “If industrialism is not to extinguish the race, it must be subordinated to the requirements of man’s nature. The true criticism of market society is not that it was based on economics – in a sense every and any society must be based on it – but that its economy was based on self-interest.”

Echoing Karl Marx, Polanyi reacted very negatively to the power of markets to subject work and labor to price, not dignity. With the rise of capitalism, he said, the market had replaced community with an atomistic and individualistic form of social organization.

The fault of capitalism, according to Polanyi, was to allow an economic sphere within society to become the source of moral law and political obligation.

I was struck by this insight as the premise of the Caux Round Table for Moral Capitalism is that morality – the ethics of good stewardship – can be the source of rational action in the economic sphere. That is why we call our understanding of markets “moral” capitalism.

I also learned from Polanyi, to my surprise, that the intellectual origin of the proposition that, by a law of nature – that of the animal kingdom, self-interest and survival of the strong were the necessary drivers of capitalist success was the thinking of one Joseph Townsend who in 1786 wrote a paper on poverty wherein he described the survival of the fittest between goats and dogs on the island of Fernandez in the Pacific ocean off the coast of Chile. The story was myth. Nevertheless, according to Polanyi, Townsend’s inference that animal social justice is also the driver of human economic behavior was later picked up by Malthus, Herbert Spencer and Charles Darwin to form the a-moral basis of an absolutist capitalism free from regulation and social control.

The important point to note is that to Townsend and Spencer, a law of nature peculiar to animals was assumed to apply as well to our species of mammals.

If, to the contrary, we humans have a moral sense, then there is no necessary prohibition of our applying that human standard of judgment to economics, permitting society and the state to engage with market forces and the self-regarding temptations they engender.

Is Modernity Now History?

I was teaching in Bangkok recently and there was witness to gridlock in Thai politics where an election did not produce a majority political coalition. Then, I was in Australia just before the election which confirmed a very split electorate there as well. Now, we have election results in India which gave victory to the intensely Hindu communal vision of Narendra Modi.

Globally, we seem to have entered some new era of tension and standoff between very divergent political cultures. On one side is an internationalist mindset comfortable with globalization. On the other side is what has been framed as populist nationalism opposed to global institutions and arrangements.

Global internationalism seems the natural result of modernization – industrialization, the rise of middle classes, global supply chains, rational/legal bureaucracies and highly educated elites. Populist nationalism privileges national communities over internationalism and cosmopolitan tolerance of others.

Perhaps we should reconsider the once sacrosanct assumption that modernization will inevitably replace traditional cultures, values and behaviors?

We should then consider what role the Caux Round Table for Moral Capitalism’s principles for business, government, civil society and ownership of wealth might play in the interface between universalistic standards fit for globalism and the more parochial concerns of populist nationalism.

I thought of how the once very prominent thinking of Harvard sociologist Talcott Parsons, a student of Max Weber, might explain our dilemma of transition from modernity to some newer form of global community.

A review of Parson’s concept of “pattern variables” of social action is here for your consideration.

Moral Capitalism Scientifically Validated

It was most reassuring to read recently Michael Tomasello’s book Becoming Human for its recitation of many observations and experiments on the moral development of young apes and young people. Tomasello makes a case for the unique humanness of our species arising from a moral sense which each of us learns as children.

Actually, that case was advanced by Mencius in China centuries ago.

If, as Herbert Spencer asserted in 1851, we humans have no moral sense, then any thought of running capitalism along ethical lines would be foolish. Since Tomasello now provides more research evidence that our moral sense is real, then the effort to shape norms and practices for moral capitalism is not a fool’s errand.

I include here a precis of Tomasello’s argument.

I hope you find it persuasive.


The other day, on a whim, I wondered what William Blackstone wrote about joint-stock companies. Blackstone wrote his thorough and erudite Commentaries on the laws of England between 1765 and 1769. His presentation of English common law as a coherent system of justice resting on natural law dynamics inherent in human nature solidified the intellectual framework for constitutional democracy under the rule of law ideal, a great boon to humankind as we have seen over the last 250 years.

Somewhat to my surprise, I did not find any reference to joint-stock companies in his index.

But I did find a reference to “partnerships.” Turning to page 437 in Volume 3 in my copy of his Commentaries, I made (to me at least) an exciting discovery overlooked all these years of legal study.

Blackstone commented on partnerships – a form of business enterprise with shared ownership and responsibilities – in his chapter on the courts of equity. In addition to partnerships, it turns out he put most activities in what we would consider business or capitalism under the jurisdiction of courts of equity and not courts of law.

Equity, he said, had jurisdiction of all matters where an accounting is required: partnerships, personal assets, debts, estate gifts and bequests, distribution of the residue of holdings, of deposits of goods for security, holders of goods on behalf of others, “factors” or wholesalers and agents.

Courts of Equity also had jurisdiction of cases of “security” where money was lent on the pledge of property as a security for re-payment, such as a mortgage. The pledge on oath created a moral obligation to perform. Thus, the basis for modern finance was put under the supervision of equity.

Any property put in trust for management by a trustee of some kind – a corporate director for example – was also under the jurisdiction of equity.

He wrote “It would be endless to point out all the several avenues in human affairs and in this commercial age, which lead to or end in accounts.”

Now, contracts, both express and implied, so necessary for finance and commerce were under the jurisdiction of courts of law unless some fraud or misrepresentation or other malfeasance was the cause of the dispute over performance by one party or the other to a contract. Then, the aggrieved party could move the litigation to a court of equity.

For centuries, the English lived under and argued their disputes with each other in two different systems of court procedure. One was law and the other equity. To oversimplify, law was based on rules allocating rights and powers, while equity was based on good morals to prevent abuse of powers given by the law. The combined system, we could say, attempted to integrate law with morals.

In the U.S. today, there is no longer such a distinction between two kinds of courts or two different procedures. In 1938, the federal courts combined law and equity in one system of procedure. Equitable doctrines can be applied by any court if relevant to the case before it. Thus, for decades, American law schools have not taught separate courses on equity and only a few have courses on English legal history.

But there is support for the Caux Round Table for Moral Capitalism’s mission of promoting moral capitalism in Blackstone’s discussion of equity.

Intuitive resistance to both the ideal and the practicality of moral capitalism arises from marginalization of the moral sense as a factor in human affairs. Giving up on the moral sense condemns capitalism to a brutish form of competition. With a conviction more in keeping with Herbert Spencer’s social darwinism and its modern progeny, the agency problem, many think of business as purely immediate selfish exploitation of opportunity without regard for good faith, proportionality, stakeholders or long-term consequences.

Law would be enough for such enterprise. There is no need for equity.

Moral capitalism, however, requires equity. Moral capitalism posits that “moral” factors not only should be applied in business but that doing so can predictably lead to better outcomes.

Blackstone’s commentary demonstrates that in his time, moral factors (equity) were required as a part of doing business in a “commercial” society. His presentation of the laws of England is proof that moral capitalism has a claim to legitimacy before the law.