Ethical Capitalism

This happens to me from time to time. Over a span of no more than a few weeks, without any preconceived agenda or plan, I come across several disparate pieces of information (books, articles, movies, websites, etc.) that all inadvertantly conspire to solidify concepts that have previously been loosely floating around my brain. The last time it happened was when I started getting the feeling that evolutionary psychology was approaching a tipping point on its way to becoming a set of ideas that would have applicability beyond the walls of academia. (Click here for the result.) This time, the focus is on capitalism - specifically, whether it is possible to have a long-term capitalist system that does not ultimately cause more problems that it solves. To start with my conclusion, the answer is a resounding yes.

As the ten or so folks who visit this site regularly know, I've suffered some painful disillusionment recently with respect to America's behavior on the international stage over the last few decades. (See this and this.) That was the start. Then, I saw the documentary, Enron: The Smartest Guys In The Room, which essentially explains the whole debacle from Enron's inception to its eventual demise. Not pretty, to say the very least, and as the trial of Ken Lay and Jeff Skilling gets underway, it would be very easy to look at all this and come away with the feeling that capitalism is just another band in a spectrum of insidious human institutions. However, it's tough to square that with the irrefutable fact that those populations that have embraced free market capitalism have, on pretty much any measure you care to examine, enjoyed more prosperity than they did under any other system. Still, there must be something going on here. That something is the constant of human corruption.

I think it's critical to recognize that some systems, such as communism, are inherently flawed, which is to say that no cadre of saints could ever wring success from them. Even if you were to hypothetically (read: impossibly) factor out all manner of human corruption, the result would be the same - mass suffering and a general decline in overall prosperity. In the case of communism and its cousin, socialism, the culprit is the necessary role of information in the execution of decisions regarding the means of production and the distribution of that which is produced. As Friedrich Hayek tells us in, The Fatal Conceit, it is simply impossible for a centralized authority to have the information it needs to make good decisions across a panoply of individual situations. That's how you end up with a surplus of plates, but a shortage of forks. But capitalism is not one of those institutions.

Capitalism, as an institution, is perfectly sound. It works with human nature, which is why it works at all. But like all other institutions that involve our species, it is always at risk of being corrupted from within. As Brian Tracy so clearly writes in, Something for Nothing, all humans are hardwired to be lazy, greedy, ambitious, selfish, vain, ignorant, and impatient. In addition, all humans have the same basic heirarchy of needs - safety, security, comfort, leisure, love, respect, and fulfillment - in that order. The question is how we get from our inherent attributes to the satisfaction of our needs. It would be easy to say that good institutions are the answer. In a sense, they are, but I think we're now seeing that our good institutions could still use some work.

Is capitalism bad because big oil has enough money and enough influence to push our leaders to embrace wholly unethical practices when dealing with underdeveloped countries? After all, it was capitalism that made it possible for big oil to get where it is today. Is capitalism bad because a few nefarious fellows (like Lay, Skilling, and Fastow) can conspire to plunge California into an energy crisis and hoodwink Wall Street and the rest of the world into losing billions of dollars on a house of cards? No and no. The problem is ethics.

I have recently come across a company called LRN. Here's what they do:

LRN helps leading companies around the world inspire do-it-right cultures. We provide everyone in the enterprise with the legal and ethics knowledge needed to make better decisions and take appropriate actions.

The founder and CEO of the company is a guy called, Dov Seidman. He's a Harvard Law grad (The company has its roots as a legal services provider.), and it appears that his mission in life (and business) is to bring ethics to the forefront of corporate American culture. What intrigues me is that it appears that the business environment in this country following all of the scandals of late is becoming more and more receptive to this. Sounds good, right? So how does it work?

The basic idea is that companies, especially large ones, have to embrace a culture of ethics. That means they can't just look at regulatory and legal issues as hindrances to business as usual. They, meaning the employees at large, have to internalize what it means to operate ethically. Again, it sounds great, but how do you make it happen?

It takes a commitment from the very top to instruct every member of the organization on what it means to do business ethically, and it takes a system that is designed to penalize unethical behavior, and, more importantly, to reward ethical behavior. The idea is not to determine some universal set of ethics across all industries and then chip away at getting more and more companies to buy into them. It's about getting each and every company out there to settle on a set of values and then implement systems that ensure that they are observed at all levels. This is no easy task, but it can happen.

Up until summer of 2005, I worked for IBM. One thing that I really appreciated about working for Big Blue was the fact that every employee had to commit to a set of Business Conduct Guidelines. Every year, we had to login to the IBM intranet, read the guidelines, and acknowledge our commitment to them. Though I can't speak for everyone, I can certainly say that I took those guidelines seriously. They meant a lot to me, and I was all too happy to share them with customers.

As a business development professional (read: sales guy), I was constantly competing with other big names for business. I often emphasized the fact that IBM is an ethical company with a commitment to doing the right thing by its customers. To some, this no doubt came off as standard sales fluff. However, given the fact that no complex business relationship is hiccup-free, savvy customers are comforted to know that when things go wrong, the company on the other end has a policy of being on the up and up. Culturally-speaking, we at IBM believed we held the moral high ground, and I can tell you that we were often rewarded for it. This is what Seidman envisions for corporate America.

In fact, in 2004, Seidman testified before the United States Sentencing Commission. Here's the deal with the commission:

The United States Sentencing Commission is an independent agency in the judicial branch of government. Its principal purposes are: (1) to establish sentencing policies and practices for the federal courts, including guidelines to be consulted regarding the appropriate form and severity of punishment for offenders convicted of federal crimes; (2) to advise and assist Congress and the executive branch in the development of effective and efficient crime policy; and (3) to collect, analyze, research, and distribute a broad array of information on federal crime and sentencing issues, serving as an information resource for Congress, the executive branch, the courts, criminal justice practitioners, the academic community, and the public.

At the time of Seidman's testimony, they were considering the role of ethics in determining how to handle legal infractions by business, large and small. Here's a link to the whole transript. It's a bit long, but Seidman's arguments are really compelling. Here's a snapshot:

Compliance is about self-governance by its very nature. And therefore, if we believe that the most powerful form of self-governance is further down the spectrum of culture beyond mere acquiescence with law, then only ethics can get us there. I'm also rejecting as unfeasible in today's world is that a set of corporate mechanisms and bureaucracies can be created, indeed pure compliance programs that attempt to ensure that everyone acquiesces and complies with the law. Instead, I believe that compliance with law is, in fact, an outcome - an outcome of a true self-governing culture.

Quite right. In terms of Tracy's basic human attributes, we can say that the system that positively harnesses our inherent greed and selfishness in the pursuit of our aims is ethics. And when the right ethics are in place, we find that our needs for love, respect, and fulfillment are more easily satisfied. You see, as social animals, we thrive on the acceptance of others. Having a common set of values and a system that illuminates breaches in those values is the key to keeping the dark side of human nature in check. It's a kinder, gentler version of the public hanging.

If, during my says at IBM, I had chosen to do as many competitors did, offering kick-backs to decision-makers for choosing IBM, I would have been met with raised eyebrows at the very least (and, more likely, disciplinary action). My colleagues would have thought less of me for taking the easy wrong over the hard right. Though we were co-workers, we were also competing with one another in some ways - in terms of quota attainment and such. By operating unethically, I would have given myself an edge, which was tantamount to cheating. Yes, I lost deals to competitors who delivered big screen TVs to CIOs who bought their wares, but I could always hold my head up, and that was ultimately more important to me than getting the deal or my acknowledgement of the IBM Business Conduct Guidelines. That's an ethical culture, and it came about because I was working within a system that would not allow me to overly satisfy my needs for security and comfort (by way of sales commissions) without jeopardizing my need for respect. A good ethical system creates checks and balances between human attributes and human needs - breaches mean that needs don't get met. Simple, and completely consistent with human nature.

The bottom line is that the solution to the problems of capitalism are out there. They're not easy, and they have costs, but the benefits far outweigh them. Indeed, as Seidman says, compliance with the law is an outcome of an ethical culture. But there are many others, the best of which is the value of being known for doing the right thing. That means that we have to reject the understandable, but intellectually lazy, conclusion that capitalism in itself is the problem. As always, it is our implacable human nature that poses the challenge. Fortunately, just as the invisible hand co-opts our nature to produce the best of all possible environments, so can ethics keep the invisible hand from reaching in the cookie jar when no one is looking.