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September 2018 posts

Profits and the Well-Being of America

By Jonathan B. Wight

There are well-meaning people who have supported Trump while holding their noses.  Their rationalizations are many, but include those who justify it on the basis of the corporate and personal income tax cuts, and the drop in environmental and other regulations.

Their claim is that what is good for corporate America and the rich is good for America more broadly.  The old quote, “What’s good for GM is good for America,” is a misquote of Charles Wilson, but you get the idea. 

On one level, the claim is true.  A vibrant economy provides jobs, pensions, and wonderful products at affordable prices, especially to the poor and middle class.

But the claim is also situational, and depends on the context.  Adam Smith was quite aware of the contextual drama, because he consistently noted how powerful interests try incessantly to game the system.  Those powerful players are sometimes members of a labor union, but more often than not are the capitalists themselves and their politician stooges. 

Hence, to ensure that capitalism works for all and really is in the broader social interests, Smith insisted on constraining the laissez faire market in a number of ways.  Smith’s goal was to reduce the market power of the powerful, and elevate the market power of the weak. 

In the quotes below, Smith notes that a high rate of profit is not the goal of society.  High profits are a sign of a country going rapidly to ruin, through rigged markets.  In a competitive market, profits will be low, and are a sign of healthy corporate rivalry that gives more power to the consumer. 

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All quotes are from The Wealth of Nations (Liberty Fund edition, 1981):

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.” (84)

“But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin.” (Chapter: [I.xi.p], 162), my emphasis added. 

“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the publick. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the publick; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.” (163)

“The violence and injustice of the rulers of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit of a remedy. But the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be the rulers of mankind, though it cannot perhaps be corrected, may very easily be prevented from disturbing the tranquillity of anybody but themselves.” (318)

“As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves, so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market. (318)

“The high rate of profit seems every where to destroy that parsimony which in other circumstances is natural to the character of the merchant…. Have the exorbitant profits of the merchants of Cadiz and Lisbon augmented the capital of Spain and Portugal? Have they alleviated the poverty, have they promoted the industry of those two beggarly countries?” (396)

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So, to those who support Trump simply for the boost to stock prices, please ask yourselves:  are high stock prices and high corporate profits--both of which disproportionately benefit the top 1% of families--the right measure of economic health?  Are there other ways of stimulating the market that produce broader social benefits?  

[Thanks to Ben Campbell for an interesting discussion of this issue.]

More on Richard T. Ely

By Jonathan B. Wight

In an earlier post, I introduced readers to the work of Richard T. Ely (1854-1943), one of the founders of the American Economic Association and a leader of the progressive movement. 

Ely also published in 1889, An Introduction to Political Economy (Chautauqua Press: New York).

It was refreshing to read such a pluralist text that is analytical and ethically sensitive.  Here is Ely, near the start of his principles text, addressing the issue of the “moral limits to markets” (that’s not his term, but it applies):

“What is the real origin of the feeling that it is not creditable to drive a hard bargain with a near relative or friend?  It can hardly be said that there is any rule of morality to forbid it.  The feeling seems to me to bear the traces of the old notion that men united in natural groups do not deal with one another on principles of trade…. the old feeling of brotherhood [forbids] hard bargains.”

Second, Ely talks about progress in somewhat the same terms as Adam Smith, namely, that pain is produced when a situation is out of harmony with our moral sentiments. That is, the impetus for social progress comes about from feelings of disequilibria (not rational arguments alone). 

Ely speculates that the identified social problems of his day were thus partly the reflection of a higher ethical standard.  Ethical standards arise as a result of the progress in religion (think of Ralph Waldo Emerson) and: 

“[because of] the development of humane sentiments in all classes.  Things trouble us now which one hundred years ago we would have taken as a mere matter of course.  The contradiction between things as they are and our social ideal is painful.”

This is a lovely insight.  When we note the many problems we see around us, many of these are simply the result of overall progress!  If we hadn’t progressed, we wouldn’t see these issues as problems—we wouldn’t have the “lenses” to see them, because our moral sentiments would not have been aroused. 

Seeking Adam Smith

By Jonathan B. Wight

A new book has recently crossed my desk by Eli P. Cox III, Seeking Adam Smith: Finding the Shadow Curriculum of Business (2017). 

Cox maintains that business schools and economists have willfully misunderstood Smith’s message (a familiar refrain on this blog). 

Cox is professor emeritus of marketing management at UT-Austin, with an interest in corporate social responsibility and business ethics.

Here are some Smith quotes that Cox finds:

“In the midst of all the exactions of government, this [nation’s] capital has been silently and gradually accumulated by the private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement in almost all former times, and which, it is to be hoped, will do so in all future times.” (Wealth of Natons)

So virtue ethics requires prudence.  But prudence does not stand in isolation from justice.  Excellent point.

Cox goes on to cite a passage from Theory of Moral Sentiments about how injuring our neighbor can never be justified if the motive is simply to give greater happiness to ourselves.  Cox’s quote appears to be a paraphrase.  Here is the exact quote from the Liberty Fund edition of 1982:

“There can be no proper motive for hurting our neighbour, there can be no incitement to do evil to another, which mankind will go along with, except just indignation for evil which that other has done to us. To disturb his happiness merely because it stands in the way of our own, to take from him what is of real use to him merely because it may be of equal or of more use to us, or to indulge, in this manner, at the expence of other people, the natural preference which every man has for his own happiness above that of other people, is what no impartial spectator can go along with.”

Cox also correctly points out how Smith was not an advocate for laissez faire (another deep misunderstanding that many have a vested interest in perpetuating). 

Cox’s book is recommended as a good and important read.

Research Bias and Nondisclosure

By Jonathan B. Wight

The New York Times reports on a huge potential ethics violation: Dr. José Baselga, chief medical officer at Memorial Sloan Kettering Cancer Center in New York, has been publishing a large number of cancer research studies without disclosing that he has received millions of dollars from the drug companies under study.

This is bizarre and obscene.  As a researcher and the editor of a major journal, Dr. Baselga decides what information the public sees.  He made his own decision that his industry contracts were not relevant and later said the omissions were “inadvertent.” Really?  He forgot in over 100 papers? 

As noted in the exposé:

“At a conference this year and before analysts in 2017, he put a positive spin on the results of two Roche-sponsored clinical trials that many others considered disappointments, without disclosing his relationship to the company. Since 2014, he has received more than $3 million from Roche in consulting fees and for his stake in a company it acquired.”

There were many other such examples. 

The medical community has no sanctions, apparently, for dealing with nondisclosures. Does anyone think the free market is working here?  There is rampant asymmetric information, and the market cannot expect economic efficiency or basic fairness when large moral hazards exists.

Should there be criminal penalties for conflict of interest omissions, when the downside involves human lives?

Serena Williams’s Loss

By Jonathan B. Wight

The U.S. Open Women’s Tennis final was a brilliant match between two phenomenal players, Serena Williams and Naomi Osaka.  It was marred by ethical issues that left everyone with bad tastes in their mouths.

Osaka won, 6-2, 6-4 in an amazing display of poise and brilliance for a first timer to a majors final.

The controversy centered on Williams, whose coach admitted he was signaling to her, and she was penalized by the umpire.  She was then also penalized for unsportsmanlike conduct for slamming and breaking her racket.  Williams took umbrage and continued to berate the chair, calling him a “thief.” That led the umpire to penalize her an entire game.  That’s the first time I’ve ever witnessed an umpire penalizing anyone an entire game.

Williams’s complaints have merit:  She did not actually see her coach’s hand signals (so the violation was really on her coach’s part).  Moreover, although coaching is illegal, “everyone” allegedly does it.  And the game penalty for sassing the umpire seems excessive, especially since male players say much worse things and don’t get penalized.

I grew up playing tennis in the 1960s, an era of gentlemen and gentlewomen on the courts.  Arthur Ashe is the key role model, but others such as Rod Laver and Billie Jean King set the tone to me.  To my memory, these players showed self-control and composure, and grace when losing. The displays of bad-boy behavior did not appear until the 1970s.

Williams, for her age and all her wins, should have demonstrated more of all of virtuous qualities, especially of self-control. She acted like a spoiled prima donna, throwing temper tantrums.  To her credit, Serena had calmed down by the time of the awards, and showed gracefulness in supporting Osaka’s win.

To my eye, Williams’ outbursts were the result of losing.  She had lost the first set and was down a break in the second when the major controversy arose.  Perhaps she would have come back, but all Osaka had to do was hold her serve to win the match.  She was serving brilliantly and quite likely would have won anyway.

It is likely that the rules are being selectively applied, in this case against women.  Justifying bad behavior because men do it is a questionable defense. The rules and their enforcement should be gender-neutral.  

The U.S. Default

By Jonathan B. Wight

Kenneth Rogoff wrote a glowing review of Sebastian Edwards’ new book, American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold (2018).

This is a bit of American history I didn’t realize:  America de facto defaulted on its national debt in 1933, when Roosevelt unilaterally removed the gold clause from U.S. debt obligations, in order to devalue the dollar by 40%.  Prior to this, savers could ask for payment of interest in gold rather than dollars.  

This was a dramatic redistribution of wealth away from bondholders, of which I had not considered before.  Some might call it outright theft of bondholder assets. 

There were positive outcomes from the devaluation, to be sure, and the economy needed the stimulus.  Remember Greece locked into the euro and unable to devalue?  In general, the gold standard had to go in order to prepare the economy for freer markets in which currency prices could fluctuate. 

One implication of the book is that we could default again.

I like contrarian thinking, and detest it when students use words like “never” and “always” in their reports.

The idea that the U.S. will “never” default on its debt is widely reported, yet absurd on its face.  The probability of default is quite low, since right now we can simply print more money to pay the interest and principal we owe (in our own currency).  But who can say in the future?

Political problems that lead to the shut-down of government are the biggest obstacles to keeping our credit rating.