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May 2015 posts

Dogs, Dining, and Paternalism

By Jonathan B. Wight

The discovery of germs is certainly one of humanity’s greatest scientific achievements.

But the obsessive-compulsive behavior to eliminate all germs is not only freaky, it is counter-productive.  Humans have a fine symbiotic relationship with our microbe friends.

Some people feel a panic when just thinking that THERE ARE GERMS ON THIS FAUCET!  ON THIS DOOR HANDLE!  That’s why paper towels are strewn over the floor of restrooms, as people use the towel to open the door and simultaneously dispose of the icky thing before it bites.

Outside of hospitals, Americans are way too concerned about germs.  Another symptom of this is the paranoia about having dogs anywhere near food sales. Dogs are typically banned from restaurants, grocery stores, and coffee shops—despite the fact that dogs visit hospitals all the time to lift spirits.

Dogs.diningIt wasn’t always this way. My local coffee shop used to let me settle in with my Shetland sheepdog at my feet, to savor a cup and mingle with others so inclined.  Then the dreaded health inspector showed up and put the kibosh on the practice.

I’m all in favor of health inspectors. It’s much easier for a knowledgeable inspector to check ovens, examine fridges and freezers, and otherwise provide the public with valuable information about roaches and expired meats. I’m much more worried about flaws of human nature and sloth than I am about dogs transmitting disease.

Let the market decide—a consumer can readily see dogs at an outdoor café and make an informed decision about whether to partake.  Consumers cannot readily see the mold in the ventilation system or the dated raw oysters. 

Fortunately, a number of states have started allowing restaurant owners to decide for themselves who their patrons will be: California, Florida, and Maryland, for example. Last summer I spent several delightful weeks in Turkey, where diners were regularly treated to the happy and docile companionship of canines while they dined al fresco. It felt more human eating around pets, and not making a federal case of it.

The Tao of Paul Polman

By Jonathan B. Wight

Paul Polman is CEO of Unilever, the giant European conglomerate that has revenues of over $50 billion. He first made waves in 2009 on his first day on the job when he announced the company would no longer issue earnings guidance and would stop issuing quarterly reports.

The micromanaging of quarterly earnings takes an incredible toll on long run corporate performance, as J.M. Keynes observed in Chapter 12 of The General Theory (1936).  If you haven’t read that chapter, put it on your short list.  Moreover, genuflecting to the financial market leads to ethical lapses, as Polman notes in this interview in today’s Washington Post:

Unilever“I saw a recent study that 75 percent of U.S. chief financial officers would take the wrong decision in the quarter over missing their guidance. You can see how that leads companies to a shorter existence or to making the wrong decisions. In the latest survey of the World Economic Forum, a majority of CEOs said the pressure they’re getting from the board is more about the short term than the long term.”

The interview with Polman is also interesting for the recognition that meaning in life is a growing factor in recruitment and retention in companies.  And meaning in life no longer means making the most money, but rather doing something for others or the planet. 

“You see how many companies are searching for purpose…. Many companies have difficulties attracting people, for example, and you have to wonder why. Is it because of salary? Often not, because anybody can ultimately pay what needs to be paid.”

 “It's not just about making money, especially for the millennial generation. They want to make a difference in life, so they look for companies that have a strong purpose. This is a big challenge in many companies. Trust is low in business. Trust in CEOs is even lower. Many companies in the private sector are disappointing the citizens of this world by manipulating labor rates, foreign exchange rates, putting horse meat instead of beef out there, or thinking that it's totally acceptable to make a t-shirt from a collapsing factory. Increasingly, people don't want to work for these companies anymore, and consumers don't want to buy from them….”

 “[I]f you work at an insurance company that sells premiums you wouldn't even sell to your wife or your mother, how happy would you feel to work there? It's going to eat you up over time. It might last a few years, but it doesn't attract the best people, and it certainly doesn't create the energy and engagement that you need to be a long-term performing company….”

 Well said.  The moral sentiments of the workers and customers are outraged.  On a related topic, Polman reveals the dysfunction of corporate CEO salaries, which are not related to performance, but rather to status and bragging rights:

“[P]eople think if they don't get a salary increase, or if they don't earn a lot of money, they are not being seen as good-performing CEOs. This peer pressure drives dysfunctional behavior…. Most companies have salary policies that say, “We want to attract the best CEO, so we need to be in a top percentile,” and then you get a race to the top. That is really what has happened over the last decade or two….”

 Finally, he puts a nail in the coffin of supply-side economics as it affects the rich:

 “If you would pay me double, I'm not going to work twice as much, because I'm already probably maximizing my time available. And would it change the way I do things? Not really, because I try to do the right things for this company for the longer term…. I've often said that even if I didn't get paid, I would still do the job. I'm still ashamed when the topic comes up. I always feel embarrassed, to be honest.”

 Polman ultimately embraces Adam Smith’s notion of superior prudence—after a long life of learning and putting our self interest to the forefront (normal or narrow prudence), a virtuous person begins to reach out to embrace as his own the interests of a wider community.

“Things you experience in life—sometimes pleasant, sometimes not—form part of your character. That is a journey we go through until the day comes…. The moment you discover in life that it's not about yourself, that it is about investing in others, I think you're entering a steadier state to be a great leader. Because above all, I think the main quality of a leader is to be a human being.”

Coincidentally, Tim Cook, CEO of Apple, recently told millennial graduates:

“There is opportunity to do work that’s infused with moral purpose….You don’t have to choose between doing good and doing well. It’s a false choice, today, more than ever.”

Reality check: When something goes mainstream, like the push for purpose in business, you can expect lots of fraud and lots of fakers. Insincerity begins to flow like honey.

Yet I am a firm believer that business owners can have a higher moral purpose than making money—and they certainly need to make money to be sustainable.  And making money--if the market is competitive and does not exhibit market failures of externalities or asymmetric information--is itself a virtuous endeavor when it means serving customers.  

The last third of my economic novel, Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue (2001) deals with a real company in Silicon Valley that put Smith’s authentic moral sentiments approach to work.  It is not a panacea and of course will face challenges. But being a human and doing a job are often compatible and produce synchronicities in a business setting.  When will this idea become mainstream in micro theory?

Adam Smith’s 15 Minutes of Fame

By Jonathan B. Wight

Smith noteOkay, it will be more like 13 years of fame when Adam Smith's portrait goes off of the Bank of England £20 note in 2020 (it first appeared in 2007).

That’s not a bad run, considered Smith bumped Sir Edward Elgar off.  And considering that Smith was a Scot, and that the Scottish National Party just won big in the latest UK elections, his portrait might get off just in time. The new note will showcase a person from the arts, selected and designed in part with the public’s help.

Changing pictures on the bills may be expensive, but affords lots of opportunity for seignorage—as people fondly store these notes away, never to be spent. It’s a nice racket, if you can get it.

Hitchens Debated Lennox on God and Morality

By Jonathan B. Wight

In 2009, a few years before his death, writer Christopher Hitchens debated Oxford mathematician John Lennox about the existence of God and the role of religion in modern life. Hitchens

 It was a rousing debate. Hitchens was the non-believer (he did not like the term atheist, for reasons he explained). Lennox supported a standard Christian view. 

One can’t but be impressed by Hitchens’ clever mind and quick wit. Lennox offered some good early points but then seemed to fade the longer the debate went on.

Hitchins makes the reasonable claim that if there had never been a single organized religion humans would have figured out rules of morality—which seems reasonable for anyone who ascribes to the moral sentiments approach.

While Hitchens clearly (in my mind) won the debate, I am reminded about why these debates seem so fruitless. Hitchens admits that he cannot explain why the urge for experiencing transcendence is such a powerful drive in all human societies. That powerful urge naturally gives way to seeking words and rituals for bringing those experiences to mind.  Pretty soon, dogmas are formalized and voilà—religion appears.  (And of course, religion takes on a power of its own to oppress and wield power, particularly if it is a monopoly—no big surprise there.)

The urge to connect with the transcendent is wonderfully explored by Teilhard de Chardin’s The Phenomenon of Man (1955) as part of human evolution.  So I’m terribly impressed with Hitchins’ mind, but he seems to be uninterested in the creation of meaning through the transcendent and imaginative interconnections of mind and spirit, which is sad both personally and professionally.

[Thanks to Bill Beville for the link.]

Public Spirit and Other Matters

By Jonathan B. Wight

Young Back Choi makes some interesting points about Adam Smith in a classic paper, “Smith’s View on Human Nature: A Problem in the Interpretation,” which appeared in RoSE in 1990.  

Choi makes several intriguing claims.  The first is about “public spirit” or the patriotism that would lead someone to sacrifice their life for their country:

To put it slightly differently, how are we to explain "public spirit"? Some may even deny that there is such a thing as "public spirit," but Smith thought it was real enough: 

“When a young officer exposes his life to acquire some inconsiderable addition to the dominions of his sovereign, it is not because the acquisition of the new territory is, to himself. an object more desirable than the preservation of his own life. To him his own life is infinitely more valuable than the conquest of a whole kingdom for the state which he serves . But when he compares those two objects with one another, he does not view them in the light in which they naturally appear to himself, but in that in which they appear to the nation he fights for. To them the success of the war is of the highest importance; the life of a private person of scarce any consequence. When he puts himself in their situation, he immediately feels that he cannot be too prodigal of his blood , if by shedding it, he can promote so valuable a purpose. In thus thwarting, from a sense of duty and propriety, the strongest of all natural propensities , consists the heroism of his conduct” (TMS, p. 191).

"Public spirit," therefore, is not to be explained by utility consideration. "Public spirit," rather, is the result of people sympathizing with certain causes, rather than that of utilitarian consideration.

Choi goes on to consider the thesis that The Wealth of Nations, far from supporting the homo economicus viewpoint of utility maximization, actually introduces sympathy as the modus operandi of the human person. This solves the Das Adam Smith Problem in a novel way. 

There are two points I would add to Choi’s analysis.  The first is to dig into Smith’s rationale for the division of labor, which as Choi notes arises spontaneously as a result of the desire in human nature to truck and barter.  But from where does this urge arise? Smith argues that the instinct for exchange arises initially not from financial motives but from a more pressing psychological desire to be believed and to persuade others:

 “If we should enquire into the principle in the human mind

Continue reading "Public Spirit and Other Matters" »

Bernanke Blog

By Jonathan B. Wight

It’s been fun listening to the inner Ben come out.  The guy who for eight years had to carefully watch every syllable uttered now has a world stage on which to pontificate—his blog.

Recently he wrote a fascinating piece on the Taylor Rule.  The Taylor Rule can be used to predict and prescribe Fed actions based on a simple numerical formula involving the output gap and inflation.  Bernanke shows that Taylor’s complaining about the Fed not following his rule is both factually incorrect (once things are measured properly) and dangerous for policymaking if it becomes rote. Bernanke concludes:

"I don't think we'll be replacing the FOMC with robots anytime soon. I certainly hope not."

This discussion reminds me of the old monetarist debates of the 1970s, when Milton Friedman and others wanted to replace Fed autonomy with a rule to increase the money supply by some constant percent per year, come hell or high water.  If monetary growth is set at 2%, and the velocity of money grows by 2%, then overall nominal GDP will grow by 4%.  If overall productivity is growing by 2%, then inflation will turn out to be 2%.  Perfect!  The Fed has nothing to do but slowly increase money at a constant rate.

With a monetary rule the Fed would not longer be able to use any discretion.  Velocity
Of course, this utopian idealism assumes that velocity (the rate of spending of money) grows predictably and stably as it did in the 1970s (green line in chart).  Then the 1980s came about and velocity went haywire (blue line).  So much for simplicity!

Both the prescriptive Taylor Rule and the monetarist rule seek to replace humans with computers. This would not be a bad thing if we could not trust the characters of the leaders of the Fed, if we thought they were manipulating money growth for their own gain or for some other political purpose.  Indeed, I think there is evidence that Arthur Burns did this as chair of the Fed in 1972 (helping re-elect President Nixon).

But if you trust both the motives and the judgment of people on the FOMC, I am a supporter of discretionary monetary policy.  There are too many unknowns.  Do you really want the plane running on auto-pilot during unusual take-offs and landings?

But the key point is that we do need people of character at the Fed whose motives and abilities we trust--not political hacks with ideological axes to grind.