Archive for the ‘capitalism’ Category

Pharma and the Spirit of Competition

Once again, the pharmaceutical industry is under attack, and once again it is for all the wrong reasons.

The problem this time is this: many of the new generation of blockbuster drugs are jaw-droppingly expensive, costing tens of thousands of dollars per patient per year or even per treatment. Part of the reason is that many of them are from a category of drugs known as “biologics.” Such drugs aren’t made with old-fashioned chemistry, but are instead produced inside living cells, typically genetically modified ones, inside giant vats known as bio-reactors. It’s an expensive new technology. And the big biotech firms that make these drugs are not fond of competition.

According to the New York Times, “Two companies, Amgen and Genentech, are proposing bills that would restrict the ability of pharmacists to substitute generic versions of biological drugs for brand name products.”

The companies claim they’re just trying to protect consumers. The generic versions, they argue, are typically similar, but not identical, to the originals. These aren’t simple drugs like Aspirin or the blood thinner, Coumadin. These are highly complex molecules, and the worry is that even slight differences in the manufacturing process could lead to problematic differences in form and function.

The makers of generics, for their part, acknowledge that worry, and say they’re fine with pharmacists limiting substitution to cases in which the Food and Drug Administration has declared two drugs to be interchangeable. But they oppose any further restrictions, including ones that might be imposed at the state level and for which the name-brand manufacturers are lobbying mightily.

What are we to say, ethically, about efforts by name-brand manufacturers to limit competition and thereby keep prices and profits high? Is it wrong of them to do this in a context in which health spending is out of control, and in which patients can die from being unable to afford a life-saving drug?

But as strange as this may seem, there is arguably nothing wrong with pharma behaviour that harms patients and strains private and public healthcare budgets. They aren’t responsible for the fact that people get sick, and they’re not (usually!) responsible for the decisions made by governments or by insurance companies. A lot of the behaviour on the part of pharma that people complain about is no more wrongful than the behaviour of the woman who invents a better mousetrap, thereby putting employees of the less-good mousetrap maker out of business. Innovative, competitive behaviour is good in the long run, but net social benefit is consistent with less-good outcomes for some.

The real sin, here, isn’t against consumers or governments, but against the market itself.

Markets, and the businesses that populate them, can only promise to be socially beneficial when there is competition. When governments move to foster competition, businesses that profess to believe in free markets cannot rightly cajole governments to do otherwise. The same goes for using lobbyists to encourage government to make a market less competitive. After all, playing by the rules of the game is the fundamental obligation of business. But when it comes to changing the rules of the game, we have to look to the limits implied by the spirit of the game. That’s where pharma is going astray here. Using government to limit competition isn’t just bad ethics; it’s bad capitalism.

Feeding the Hand that Bites You

Two stories surfaced this week about companies faced with handing out prizes to businesses whose interests were contrary to their own.

One company graciously gave credit where credit was due. The other declined to do so. Is it ethical to decline to feed the hand that bites you?

The company that declined to recognize another’s achievements was CBS, which forced subsidiary CNET to alter the results of the ‘Best of CES‘ award it gives out after the annual consumer electronics show. CNET’s editors had intended to give top honours to the Dish Network’s “Hopper”, a set-top box that allows viewers to skip commercials. As reported here, CBS has been in a legal battle with the Dish Network over the Hopper, which CBS sees as threatening its stream of ad revenue. The CBS v. Dish lawsuit was cited by CBS as the reason for withdrawing the Hopper from consideration for the CNET award.

And on the other hand: the company that went ahead and gave an award to a competitor was USA Today. The newspaper, you see, had run a contest to reward excellence in print advertising. And the winner, ironically, was Google — the search giant that is cited as one of the key reasons why print advertising is on the decline.

Because both US Today and CNET are media outlets, the most obvious question here has to do with editorial independence. Media companies are in a special situation, ethically. Most of them need to earn a living, but most of them also proclaim a public-service mission, and along with that mission goes a commitment to journalistic independence. Of course, giving out awards is closer to a news outlet’s editorial function, and editorial content has never been as cleanly divorced from commercial concerns as pure news is supposed to be. But if awards handed out by media outlets are to mean anything, they need to remain pretty independent, and meddling by a parent company is bound to cast doubt on editorial independence pretty generally. CBS’s meddling in the CNET’s award has already led one reporter, Greg Sandoval, to resign.

Setting aside the media ethics angle, we might appeal to basic principles of fairness. If you hold a contest, then all eligible contestants deserve a fair shake. If you don’t want to allow your enemies to compete, it’s probably fair if you state that transparently up front. But, other things being equal, everyone deserves an equitable opportunity to compete and win. That’s basic ethics.

Then again, it’s worth reminding ourselves that business is fundamentally adversarial, and the rules that apply in adversarial domains just aren’t going to be the same as those that apply in cozier sorts of interaction. So, in the present case, we might say that the need to observe basic fairness in the treatment of contestants is legitimately overridden by the right not to harm your own interests by advertising a competitor’s product.

But the right to protect your company’s interests needs to be balanced against the kind of signal you send when you take a stand or announce a policy in this regard. What has CBS told us about itself as a company? What kind of outfit has USA Today shown itself to be? This isn’t just a matter of PR; it’s a matter of who CBS and USA Today are as companies. In many respects, you are what you are perceived to be, and what you are perceived to be reflects the actions you take in public.

NHL Lockout and the Ethics of Labour Disputes

When the rich and powerful butt heads, are they obligated to look out for the little guy?

The NHL lockout may be over, but its impact is far from forgotten. Or even clear. And the impact goes far beyond the loss of income to the NHL, its member teams and its players.

The end of the dispute may mean little to the economy as a whole, but to one portion of the economy — the portion that depends for its livelihood on the actual playing of hockey games — it means everything. The economic loss to Canada as a whole as a result of the loss of half a season of hockey may amount to less than 0.05 per cent of GDP, but the impact was felt disproportionately by the thousands of businesses and individuals that depend for their livelihood on the NHL and its players. For every Sidney Crosby or Daniel Alfredsson making millions on the ice, there is an entire ecosystem of managers, announcers, hotdog vendors, and Zamboni drivers who only have jobs because hockey is being played.

The lockout resulted, in other words, in a lot of so-called ‘collateral damage.’ Some teams had to lay off staff (in some cases, that meant hundreds of employees per team) and many businesses — from sports bars to the guy selling hotdogs outside the arena — saw business dip or even bottom out entirely.

Of course, this is true in almost any labour dispute. When auto assembly-line workers go on strike, workers at companies that manufacture parts for those assembly lines may see hard times as a result. But as many have pointed out, the dispute between the NHLPA and the NHL was a dispute between millionaires and billionaires, which gives the whole thing a distinctly different feel.

Whether the 113-day dispute was worthwhile to either the players or the league — whether either side gained more than it lost — is for them to decide. The relevant ethics question, here, is what part the financial fate of these innocent bystanders should have played in the decision making of the two parties to this dispute, namely the NHL and the National Hockey League Players’ Association (NHLPA). Should the league and players have felt any obligation to end the dispute early, in order to limit financial collateral damage?

It is tempting to cast this question as a matter of what economists call ‘externalities.’ Externalities are the effects that an economic transaction has on non-consenting bystanders. Pollution and noise are standard examples. And both economic theory and ethical theory agree that externalities are a bad thing. It is typically both inefficient and unfair if significant costs are foisted on innocent bystanders.

But economic theory, at least, doesn’t typically count the income effects of competitive behaviour as “real” externalities. If I outbid you in an auction, your interests have been harmed but not in a way that results in either economic inefficiency or real injustice. If I invent a better mousetrap and put makers of lesser products out of business, the result is ‘frictional’ unemployment but also long-term social gain. And during a labour dispute, money not being spent on hockey-arena hotdogs or Zamboni-driver wages are surely being spent on something else: one man’s loss is another’s gain.

But while not technically unfair, the outcome for bystanders is certainly unfortunate, a bad thing by almost any measure even if not the result of wrongful behaviour. And when the dispute at hand is between millionaires and billionaires, it’s worth asking at least whether the rich don’t have some duty, some social obligation, to take better care of those less fortunate.

Once upon a time, the rich and powerful cleaved to the notion of ‘noblesse oblige,’ the idea that with wealth and power come responsibility. Of course, even if the team owners and the players took such social obligations seriously, that doesn’t necessarily mean the dispute would have ended earlier. An obligation to look out for the little guy doesn’t mean an obligation to throw in the towel. But the notion of social responsibility, not to say humility, might well have done something to reduce the length, and impact, of what many regard to have been a pointless conflict in the first place.

Curbing Illicit Flows of Money

The development goals of many underdeveloped nations are seriously hampered by illicit flows of money. The money sent into those countries in the form of aid and foreign direct investment is, in many cases, dwarfed by the money that flows out as a result of money laundering, bribery, and dodgy transfer pricing. Some estimates put that outflow as high as a trillion dollars. And a lot of that money flows through, between, or within corporations.

I recently took part in a panel discussion on this topic, part of a larger event put on by a group called Academics Standing Against Poverty (ASAP).

Here are a few of what I take to be the key points, not necessarily in order of presentation, from my discussion of the topic:

Corporations have two different categories of responsibilities when it comes to curbing illicit financial flows. First, they are of course responsible for their own behaviour. Under this heading, corporations have three key obligations. First is not to game the system to avoid taxes. Minimizing taxes — even going to significant lengths to avoid taxes — may seem to be part and parcel of a manager’s obligation to maximize profits. But there is no general obligation to maximize profits, and certainly no such obligation to do so ‘at all costs.’ Even the weaker duty to ‘put shareholders first’ is a vague enough concept to be consistent with a principled stance against aggressive tax avoidance, even where taxes can be avoided legally.

A second direct obligation has to do with transparency about transfer pricing. When goods or services are being sold between branches of a multinational, the prices charged should be fair and should be rooted in a clear methodology. And total taxes paid internationally should be reported in a company’s audited annual reports. Even when gaming the system is legal, it is dishonourable.

Third, companies should have zero tolerance for bribery. Besides being corrosive to local economies, bribery is often just a lousy competitive strategy: it involves payments that cannot be guaranteed to work, and when they don’t work there is of course no recourse to the courts. Businesses generally know this, but sometimes see bribery as a necessary evil; they need to work to make it less necessary.

In addition to these direct obligations regarding their own behaviour, big companies arguably have some responsibility for the indirect effects of their operations. Major corporations support entire ecosystems of smaller businesses — suppliers, subcontractors, agents, and so on. And activities within that ecosystem can be a major source of illicit transfers. Corporations should assume some responsibility for illegal and unethical activities in their shadow. This should at least mean setting clear standards for the behaviour of the companies with which they interact, and sharing best practices. Companies are starting to do this with regard to bribery, but they should consider extending that to other areas.

Next, a point with regard to how businesses interact with governments. The least controversial, over-arching norm for business is to play by the rules of the game. Normally, governments set rules and as long as businesses play within those rules, they are at least coming close to meeting their obligations. But not all governments are equally capable of setting and enforcing the requisite rules. And the absence of clear rules doesn’t imply an absence of obligations. So, for example, the fact that the government of a small developing nation hasn’t passed regulations (as Canada and the US have done) that set standards for fairness in transfer pricing doesn’t mean that a company can be complacent.

Finally — and this bit of advice is aimed at development advocates — it is important to avoid thinking of transnational corporations as the enemy. My sense is that a significant subset of folks who are concerned with development are focused on the negative side-effects of corporate involvement in developing nations. What we need to do, though, is to harness the power of corporations rather than regretting it. Business corporations, in addition to being potent organizations, have a vested interest in reducing poverty worldwide. Anyone living on $1.25 a day makes a lousy customer and a lousy employee. Of course, corporations face a collective action problem when considering how to reduce poverty. No one corporation can do much on its own, and it’s a challenge to find ways to get long-term interests in poverty reduction to override short-term interests in profits. But still, the development community needs to see corporations as important partners. We can’t let a culture war over capitalism get in the way of helping the world’s poor.

The video of our panel discussion is now available, here:

Ethics of Risk Management

Business is, in many ways, all about risk. It’s about investing in R&D and in productive processes that may or may not result in products that customers want to buy. It’s about hiring people and then putting your company’s reputation into their hands. It’s about trying and doing new things, always aware of the chance of failure. Society flourishes because businesses are willing to take risks. Of course, some risks should not be taken, and others should be taken only subject to suitable safeguards. Risk, in other words, needs to be managed.

Modern risk management, as that term is used in corporate contexts, has its roots in finance and refers primarily to the management of financial risks. It relies heavily on mathematical models used for asset pricing and portfolio assessment. Banks use risk management techniques to determine how many loans and mortgages of what kinds to hand out, and on what terms, and to figure out (within regulated limits) how much capital they need to keep on hand in case depositors come calling to reclaim their deposits. This all requires careful calculations. Take too little risk, and you’ve got money sitting idle. Take too many risks and, well, you end up with what we saw back in 2008.

Last week I had the pleasure of hosting Professor John Boatright, as part of the Business Ethics Speakers Series that I run at the Ted Rogers School of Management. John is the guy who literally wrote the book on ethics in finance. He’s author of Ethics in Finance and editor of Finance Ethics: Critical Issues in Theory and Practice. There simply is no one better on issues of ethics in finance. And his topic last week was an important one: “The Ethics of Risk Management: A Post-Crisis Perspective.”

As John’s talk pointed out, the advent of modern risk management strategies is, somewhat ironically, implicated in the financial crisis of ’08-’09, from which we are still recovering. The mathematical models risk managers use made possible the popularization of collateralized debt obligations (CDOs) and credit default swaps (CDSs). And the fact that there were actual hard-core equations behind these instruments — which Warren Buffett “financial weapons of mass destruction” — made them seem far safer than they were. This illusion of safety encouraged very high levels of leveraging, with what we now know to be disastrous consequences.

One of the other things that John’s talk clarified for me was that there’s a kind of ambiguity in the very term “risk management.” To the public, the idea of “managing” risks sounds very much like the idea of “reducing” risks. And that, of course, sounds like a very good thing. But risk management absolutely is not the same as risk reduction. Indeed, it can be quite the opposite. Risk management is the art of finding the right level and mix of risks, the right ‘risk profile.’ What matters ethically, as John pointed out is which risks are managed, by whom, by what means, for whose benefit.

The other point from John’s talk that I want to highlight here has to do with the ‘corporatization’ of risk management. As John pointed out, business firms both encounter and create risk, and risks are encountered by both firms and by individuals in society. If, as seems to be the case, risks to individuals are increasingly being managed by corporations, we as a society need to be acutely aware of the way corporations think about risk. John quoted author Michael Power as saying that “Risk is the basis for corporations to process morality.” In other words, risk is the lens through which corporations consider and act upon their obligations.

The problem here is clear: risk is an inherently outcomes-based construct, and not everything we care about ethically is a matter of outcomes. We also care about rights and duties, and about justice in the way good and bad outcomes are distributed. If risk becomes the lens through which obligations are examined, something important is being left out. Corporate risk management, in other words, is itself a mechanism that brings risks that need to be managed.

Profiting from Prison Labour

Is it right for a company to use convicts for cheap labour? Is it unfair to pay prisoners less than the minimum wage? Is it wrong to use such labour in a way that displaces “ordinary” employees?

The Guardian recently ran a story about prisoners doing work for a private telemarketing company in a way that may (or may not, depending who you ask) be taking jobs away from law-abiding folks. The prisoners in question are being paid the equivalent of about four and a half dollars an hour — just a fraction of the legal minimum wage.

Prison labour is a great topic, ethically, in part because it tends to make people of just about all political stripes uncomfortable, albeit for different reasons. Some worry about the prisoners, who may have little option but to accept whatever crummy labour comes their way. Others may have the opposite worry: why coddle criminals by giving them the benefit of a job or job training? They’re in prison to be punished, not to learn skills. Still others worry not about the prisoners at all, but about the non-prison workers who are displaced by prisoners who inevitably “underbid” them for jobs. You could add to that list the businesses who don’t use prison labour, and who are therefor at a competitive disadvantage. How can you compete when your competitor’s labour costs are half what yours are?

We’ll leave for others the basic question of whether, or under what conditions, penal labour is itself justified, and instead focus on the business ethics issues. And as far as I can see, from that point of view there just isn’t a problem.

The “law-abiding” workers put out of a job have every right to complain, but that’s not to say that they have a justified complaint; they haven’t been wronged in any way. Other things being equal, no one has a right to any particular job. The worker who finds herself out of a job because she’s been underbid by cheap prison labour is no more treated unjustly than the worker underbid by cheap labour overseas. (For that matter, the prisoner arguably needs the job more than the average UK worker does, as does the worker overseas.) If I needed a plumber and found one who charged $100/hr and another who charged $50 an hour, the more expensive one would have no cause for complaint if I opted for the cheaper. It is reasonable, and not unfair, for me to try to keep my costs down.

Nor can a competing company rightly complain. A company reaps no unfair advantage by using prison labour. Sure, it reaps an advantage, but not through anything underhanded. As long as prison labour isn’t acquired by fraud or by, say, bribing or pressuring officials in the justice system into making decisions that violate their sworn duties, then prison labour is just another form of cheap labour. From an economic point of view, they’re to be congratulated for innovation. As long as other companies have the option of obtaining (or competing for) access to the same cheap labour pool, there’s no injustice here.

There’s an important lesson here about what counts as an “ethical issue.” The use of prison labour is, to be sure, an ethical issue. There are important rights at stake, and the decision to use such labour has important consequences. Such being the case, the decision and the details are not to be taken lightly. But that’s not to say that the practice itself is unethical. It is not, in and of itself, unjustified. But it is still good and socially healthy that the practice gives so many of us cause to pause and reflect.

Debating Capitalist Moral Decay

Is the collapse of capitalism upon us? Are we facing a moral armageddon in the marketplace? Is every scandal-driven headline another sign of impending apocalypse in the world of business? You could be forgiven for thinking so, if you read enough editorials.

Just look at the opinion pieces carried by major news outlets over the last month. Eduardo Porter editorialized in the NY Times about The Spreading Scourge of Corporate Corruption. The Atlantic carried a piece called The Libor Scandal and Capitalism’s Moral Decay, by Pulitzer Prize-winner David Rohde. Even business school professors are down with the effort to convince you that the end is nigh: Bloomberg just recently featured a piece by Prof. Luigi Zingales, who went to the apparent heart of the matter by asking, Do business schools incubate criminals?

But do editorials of that sort really bring to bear any solid evidence that things in the world of business are getting worse? Not as far as I can see.

I’ve argued before that the evidence for a real moral crisis in business is pretty scarce. Headlines don’t count as evidence. And pointing to the fact that people don’t trust business is putting the cart before the horse. People have been wringing their hands about moral decay and longing for the good ol’ days at least since the time of the ancient Greeks. So as far as I can see, things may not be all that bad. I’ve even argued that we are currently enjoying a sort of golden age of business ethics. Business today is, in may ways, more accountable and better behaved than ever before in history.

But I could be wrong about that. Really, who’s to say whether things are getting better or worse? It really depends an enormous amount on what you count as improvement, and how you measure it. So let’s call it a draw, and focus on what’s really important. The question isn’t whether moral standards in business are higher or lower than they were at some point in the past. The point is whether they’re currently high enough, and assuming the answer is “no,” what to do about it.

And there’s plenty of work to do. To begin, we need to keep working to find the right balance of regulatory carrots and sticks to encourage good corporate behaviour. And we need to figure out the right corporate governance policies and structures to foster good behaviour within corporations as well. And to the extent that bad behaviour in the corporate arena — as in literally every other area of life — is unavoidable, we need to think hard about the appropriate mechanisms to mitigate and remediate the effects of such behaviour. All of this requires a good deal of humility, of course, and a willingness to tolerate, even foster, a degree of creative experimentation.

But one thing is certain. Rather than wasting time worrying about whether the world is coming to an end, our energy would be better spent figuring out how to make it better.

Ethics on Wall Street: Hate the Player, Not the Game!

A recent survey of Wall Street executives paints a bleak picture of the moral tone of a central part of our economic system.

According to the survey (conducted for Labaton Sucharow LLP), 24 percent of respondents believe that financial professionals need to engage in unethical behaviour in order to get ahead. 26 percent report having observed some form of wrongdoing, and 16 percent suggested that they would engage in insider trading if they thought they could get away with it.

Two points are worth making, here.

First, some perspective. Far from alarming, I think the number produced by this survey are relatively encouraging. Indeed, the numbers are so encouraging that I can’t help but suspect unethical attitudes and behaviours were seriously underreported by respondents. Only 26 percent had seen something unethical? Seriously? That seems unlikely. And the fact that only 16 percent said they would engage in insider trading is also relatively benign. There are, after all, people who believe that insider trading isn’t unethical at all, and shouldn’t be illegal. They argue that insider trading just helps make public information that shouldn’t be private in the first place. I don’t think that point of view hold water, but the fact that it’s put forward with a straight face makes it pretty unsurprising that a small handful of Wall Street types are going to cling to the notion.

Second, a survey like this highlights the difference between our ethical evaluation of capitalists, on one hand, and our ethical evaluation of capitalism, on the other. One of the major virtues of the capitalist system is that it is supposed to be able to produce good outcomes even if participants aren’t always squeaky clean. In no way does it assume that all the players will be of the highest virtue. Adam Smith himself took a pretty dim view of businessmen. In The Wealth of Nations, Smith wrote:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”

And yet despite his dim view of capitalists, Smith remained a great fan of capitalism — or rather (since the term “capitalism” hadn’t been coined yet) a fan of what he referred to as “a system of natural liberty.” The lesson here is that evidence (such as it is) of low moral standards on Wall Street shouldn’t make us panic. Perhaps it should make us shrug, and say, “Such is human nature.” The challenge is to devise systems that take the crooked timber of humanity and mould it in constructive ways. Governments need to take corporate motives as they are and devise regulations that encourage appropriate behaviour. And executives need to take the motives of their employees as they are and devise corporate structures — hierarchies, teams, incentive plans — that motivate those employees in constructive ways. In both cases, while the players should of course look inward at what motivates them, the rest of us should focus not on the players, but on the game.

The Hidden Ethical Value of Social Networking

Like it or not, we are in the middle of a social networking revolution. And of course, that’s hardly news. Endless ink, digital and otherwise, has been spent on worrying over whether Facebook, Twitter, and their rapidly-multiplying ilk are the best or the worst thing that has ever happened to humankind.

A recent story about car-pooling apps highlights the fact modern technology, including social media, has a role to play in making markets more efficient. And since efficient markets are generally a good thing, this counts as a big checkmark in the “plus” column of our calculations concerning the net benefit of social media.

Carpooling is a great example, because the relative lack of carpooling today is a clear instance of what economists call “market failure” — a situation in which markets fail efficiently to provide a mutually-beneficial outcome. Think of it this way. There are lots of people in need of a ride. And there are lots of people with rides to offer. The problem is a lack of information (who is going my way, at what time?) and lack of trust (is that guy a potential serial killer?) Social networking promises to resolve both of those problems, first by helping people coordinate and second by using various mechanisms to make sure that everyone participating is more or less trustworthy.

With regard to car-pooling, the obvious benefits are environmental. But the positive effect here is quite general: just about any time we find a way to foster mutually-advantageous market exchanges, we’ve done something unambiguously good. This is one example of the ethical power of social media.

Another big enemy of efficient markets is monopoly power, or more generally any situation in which a buyer or seller is able to exert “market power,” essentially a situation in which some market actor enjoys a relative lack of competition and hence has the ability to throw its weight around. Social media promises improvements here, too. Sites like Groupon.com allow individuals to aggregate in ways that give them substantial bargaining power.

The general lesson here is that markets thrive on information. Indeed, economists’ formal models for efficient markets assume that all participants have full knowledge — that is, they assume that lack of information will never be an issue. Social networks are providing increasingly sophisticated mechanisms for aggregating, sharing, and filtering information, including important information about what consumers want, about what companies have to offer, and so on. So while a lot of attention has been paid to the sense in which social media are “bringing us together,” the real payoff may lie in the way social media render markets more efficient.

Capitalism and Bad Behaviour

Contrary to what you have heard, there is nothing immoral about capitalism.

A couple of weeks back, the New York Times published a truly scandalous opinion piece by essayist William Deresiewicz with the provocative title, Capitalists and Other Psychopaths. The views expressed in the piece are not just false, but dangerous.

The central claim of Deresiewicz’s essay is that “capitalism is predicated on bad behavior.” This claim is entirely untrue. Capitalism in no way requires bad behaviour. Indeed, to function even moderately well, capitalist markets rely on a general pattern of basic goodwill and honesty of its participants. Commerce of any kind requires trust, and trust is predicated on the expectation that the other person is going to follow some basic rules of decent behaviour. The niceties of the rules that ought to govern business are up for debate, the basic need for some sort of rules is not. Capitalism, in other words, presumes ethics.

Deresiewicz is right of course that bad behaviour does go on within capitalist systems. That’s not exactly a news flash. Nor is it unique to capitalism. There’s no evidence that either feudalism or communism magically turns humans into selfless and cooperative purveyors of peace, love and understanding.

The beauty of a free market, as Adam Smith taught us, is that it can generate benefits even even among mean-spirited. The taxi driver who took me to the airport this morning doesn’t have to like me, and he doesn’t have to be a particularly lovely human being. All that’s necessary, in order for me to get to the airport, is that he wants to make a living. But in no way does capitalism require that people be vicious or even indifferent to each other’s fates. As Nobel laureate Ronald Coase put it, “The great advantage of the market is that it is able to use the strength of self-interest to offset the weakness and partiality of benevolence.” We are limited in our sympathies for others. The good news is that, in the marketplace, our commitment to our own welfare, and the welfare of those we hold dear, inspires a great deal of creative and industrious activity that has as its very useful side-effect the provision of benefits to others.

Deresiewicz’s essay also takes a particularly gratuitous pot-shot at business school education. “I always found the notion of a business school amusing,” he writes. “What kinds of courses do they offer? Robbing Widows and Orphans? Grinding the Faces of the Poor?” This may be a joke, but it’s a baffling one. Is business management really so trivial a task that it couldn’t possibly require any advanced training? (The old-guard communists thought so, and look where it got them.) Say what you will about business schools, there’s little doubt that the better ones, at least, teach a serious and difficult curriculum. Deresiewicz’s slam here is also terribly and unnecessarily insulting to millions of business school graduates who work diligently and honestly to produce a bewildering array of goods and services. Yes yes, we all know about Ken Lay and Bernie Madoff. Those men deserve, and have already received, ample criticism. But why impugn the honesty and integrity of every single executive, mid-level manager and accountant along the way?

The key to understanding Deresiewicz’s error is to see that he thinks ethics should be exactly the same in all situations. Not just present, but the same. The virtues of the marketplace, he suggests, should be the same as those of the Christian bible. The norms we apply to commercial exchange, he suggests, should also be (or include?) those of civic life. But does anyone really believe that? If a company rips you off should you really “turn the other cheek,” in good Christian fashion? Should Apple and Dell really debate the qualities of their competing products and then have us all vote for the one winning product that we will then all buy? To expect the same behaviour in the market as in a townhall meeting makes about as much sense as to expect people to behave on a football field the same way they do in a church pew.

It goes without saying that Deresiewicz is not alone in his misunderstanding of the fundamentals of capitalism. But his misunderstanding is especially fundamental, and especially corrosive. The really troubling thing about Deresiewicz critique is that it suggests that there’s nothing about capitalism worth saving. If capitalism is intrinsically unethical — if it has the immorality baked right in — then why try to fix it? Why try to make things work better? We all might as well just settle in and enjoy our smug cynicism. Because like a lot of really trenchant critics, Deresiewicz offers us no alternative.

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