THUS SPAKE CASSANDRA

February 22, 2009

THUS SPAKE CASSANDRA

Government is not reason, it is not eloquence, it is force; like fire, a troublesome servant and a fearful master. Never for a moment should it be left to irresponsible action. -George Washington

A dear learned colleague of mine whom I respect highly recently sent me a link to an article entitled “The Growing Anger in the Heartland” (http://www.ourfuture.org/blog-entry/2009020819/growing-anger-heartland). In it, the author brings to light the growing consensus that “that we live in a country whose ruling class is deeply insane. Hardly a day goes by when you don’t see sociopathy packaged as Serious Opinion.” The commentary includes the clip of a passionate tirade of Lansing, Michigan Mayor Virg Bernero that “exemplifies a level of rage out in the country that isn’t being fully appreciated in Washington, D.C.”

This led me to reply to my friend with a story that my wife told me that I just do not know what to do with.  I recount it to you here:

We were watching the news one day several months ago, listening to reports of the hundreds of billions of dollars that were going to AIG, BOA, Citicorp, etc with apparently no fixed and clear standards, and of the heads of the Big Three automakers whose team few into Washington on separate private jets to state their case for receiving more tens of billions of dollars so they could continue their incompetent policies.

My wife looked up at me in disbelief and said “Well, I know what my grandfather Ellsworth would have said about all this.  He used to say it all the time.”

Ellsworth Brown, whom I regrettably did not have the pleasure of knowing, was a proud immigrant from Sweden who worked hard to care for his family.  A deeply religious man, he had no prejudices except against Catholics, and that was only based on his prescient belief that they permitted their clergy sexually to abuse children. (He accordingly reveled in the knowledge that his granddaughter—my wife—was born on Orangeman’s Day.) Ellsworth imparted his lack of prejudices to my wife who, for example, as a child in school did not raise her had when the teacher asked her class, as part of a discussion about civil rights, if anyone in their all white school had any black friends. When recounting the days’ events later at dinner, my wife’s mother laughed at having to remind her daughter about one of her best friends who was an African American. My wife’s response: “She’s black? Oh, yeah; I guess she is black.” She had just never been trained to notice.

Ellsworth was an imposing figure and carried himself as one would imagine of a quintessential patriarch. Standing at around six-foot-four, Ellsworth had “muscles on top of muscles” (as the inimitable Johnny Most used to describe the Celtics’ enforcer “Jungle” Jim Luscotoff).  Coming from hard-scrabble beginnings, he once found himself seeking a living in his youth as a punishing, bare-knuckle boxer of some ability, reportedly even having killed a man in the ring.  He also had a passion for the virtues of Freemasonry where he rose to the status of a thirty-second degree Mason and became a long time Worshipful Master of his Lodge.

Any way, my wife continued.  “My grandfather often said that what happens next in times like these is obvious.  The same thing has happened over and over again for thousands of years and there is no reason why this wouldn’t happen again now. When the leaders of a nation, both industrial and political, become so corrupt and so incompetent, the solution is easy.  He people rise up, take them outside, line them up and shoot them.  Done.”  I could not help but laugh, although it was a suppressed one; for the thought was indeed delicious and elegantly simple.  “Ockham’s razor,” I thought.

But that is not the story that perplexes me.  The one that I am having trouble with is this: Since chuckling over my wife’s tale, I have probably a score or two of times, when the same topic about the bailout has since come up, repeated it to professionals, professors, C-suite occupants, workers in the line, and so forth.  Without exception, everyone laughed; no one disagreed, tried to say what an absurd idea it was or objected in any way.  Indeed, the usual response was, “I wish I could disagree with that; but I just can’t”

So what the hell does this mean?


© Richard L Wise and RLWise.wordpress.com 2009. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Richard L Wise and RLWise.wordpress.com with appropriate and specific direction to the original content.

I confess to having a strong partiality for deductive logic. Conclusions that have been derived deductively are not refutable, save only if one’s main premises are faulty. Inductive logic on the other hand, like all axiomatic theories, may give us innumerable points on a curve so as to lull us into a sweet semblance of security, but is always susceptible to that one case that we have not as yet found that proves the rule. Moreover, it is based upon that most fundamental of logical fallacies; namely that of “post hoc, ergo propter hoc” (or, for those of you disdainful of classical Latin, “after this, therefore because of this”). For those reasons, in structuring any analysis I endeavour to tarry as long as possible in that perfect, halcyon tranquility of the analytic a priori, before venturing forth into the unknown, treacherous shoals of those Sirens who beckon unsuspecting thinkers with the temptations of their “scientific method.”

It was with this approach in mind that I began to wonder what exactly was entailed in our government’s concern that the money-centered institutional banks together with the Big Three Automakers “had” to be bailed out with hundreds of billions of our tax dollars. Those who have written on the subject begin and end with the question of when it is that a firm becomes “too big to fail.” Whilst defining where on the spectrum of size and importance an enterprise crosses that gossamer line of infallibility is a subject that I intend to explore another day, I am prepared, for purposes of this exposition, to deal with only the obvious, undisputed cases wherein we may apply by analogy the Supreme Court’s “stand-up-and-be-counted” definition of pornography to this situation: we may not be able to define it, but we know it when we see it. Rather, my concern is with the implications of a firm being “too big to fail;” implications which have been almost universally ignored, but which, like a two-ton, long dead elephant in the middle of the living room that everyone is trying to ignore, is beginning to stink.

For the standpoint of purely normative logic, therefore, what then does it mean to say that a firm is “too big to fail”? What do the attributes of a “failure” entail? Why and how did our society provide for the firm to achieve such status? On the macroeconomic level, such behemoths have become so inextricably intertwined in the very functioning of our economic structure that their sudden demise would lead to a chain reaction of failures and, ultimately, the collapse of the system itself. At some crucial point in their development, the nurturance provided by our capitalistic and governmental structures made them peers of those systems, with the resulting consequence that they, in turn, developed their own, independent gravitational sphere of influence. From that point forward, a symbiotic equilibrium began to develop with their environment: the larger they grew, the more they became a source of economic prosperity off of which other enterprises could feed, and this added prosperity in turn, because, they were a principal beneficiary of the political-economic environment, increased the prosperity, power and influence of these multi-national titans.

But just as a black hole warps the space around it, so do these “black holes” of economic power and social influence warp the normal rules that we take for granted and which are applicable to small to medium sized enterprises. That is also why we have different rules for our governmental units than we do for private firms. By way of example, at the beginning of the twentieth century, minimum wage laws and laws limiting the number of hours that women or children could work were held to be unconstitutional violations of the right of freedom of contract. But by 1937, however, it had become clear that the rapid and unbridled growth of the power of the barons of industry effectively had eliminated any meaningful right of “free contract” such that the new facts of economic life warranted the repudiation of the old law. Thus it became appropriate to burden industry with minimum wages and maximum hours to counterbalance the unintended economic power that our system had enabled them to acquire. Clearly, neither any American nor any of its leaders foresaw or intended industry to obtain such power; but we did encourage and intend to create an environment that would reward excellence, punish incompetence, and provide a comparative advantage to economies of scale. The adverse effects from their accumulating too much power was just an unintended consequence, although one that, in hindsight, seems obvious.

So it is with these behemoths that have grown to the point of being “too big to fail.” As with their early twentieth century ancestors, their status in our society may not have been the result of any intentional plan on their part, but was nonetheless a direct result of their having taken advantage—albeit properly—of the nurturance that our society had established. In this sense, the result too was foreseeable. So now we must ask the next question: With their having nonetheless grown in power and influence to the point whereby society cannot permit their demise so that special rules become applicable to them, have not the rules also been altered with respect to times of plenty? Putting this question another way, with their having chosen—intentionally or not—to have crossed the Rubicon of size and power so that they are so infected with a public interest that their failure is no longer a private concern, have they not also forfeited their right to claim to be governed by private company rules in general? That is, as their fate affects us all and their fortunes must be supported in lean times, should not the benefits of their success be shared as well in times of bounty? Should not as well their management be answerable to all stakeholders in the enterprise, rather than only to those transient investors who happen to hold shares of stock at any given time?

Think, too, about the fact that the Fortune Global 100 would rank between the 32nd and the 96th largest countries in the world if their revenues were simply called “gross domestic product.” Yet these companies’ governance structure is effectively a dictatorship with legal obligations only to serve the interests of a small stockholder oligopoly. Is such a governance structure for any political and economic organization of such a magnitude and influence proper in a civilized and democratic society?

R.L.W.


© Richard L Wise and RLWise.wordpress.com 2009. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Richard L Wise and RLWise.wordpress.com with appropriate and specific direction to the original content.

 

It’s foolish for society to cling to its old ideas in new times, just as it’s foolish for a grown man to try to squeeze into the coat that fit him in his youth.—Thomas Jefferson

             The American Revolution was more than a mere fight over who should rule this country.  It was a rejection of the principal that people should be governed based on the naked preferences of a monarch; that our rights and actions should be permitted only by leave of the ruler.  In its place, our forefathers established a “republic of reason,” true to the Lockean philosophy that it is best in most matters for free men to “wage their own law” with respect to their activities.  Our culture came to place a high value on individualism, and on promoting freedom of contract and choice.  In the corporate context, this created a political environment that sought to enable and enhance what a corporation’s organizers desired to do, leaving to market forces the decision as to which entities should thrive and which entities, fail.  In short, everything would be permitted unless it was specifically prohibited.

 

            There have been few, major modifications to this weltanschauung since that fateful break in 1776.  Perhaps the most famous such change was the New Deal Supreme Court’s decision in the 1937 West Coast Hotel case.  That case overruled the fourteen year old precedent of the Lockner Court’s holding that minimum wage legislation for women and children was an unconstitutional violation of the right of contract, as it imposed an “above market” premium to be paid to labor.  Implicit in this reversal was a recognition that, in modern times, the “status quo” had effectively eliminated an individual’s ability to bargain equally with big business.

 

            However little change has been made to our corporate governance structure and culture since the first corporation, the East India Company, was formed on December 31, 1600.  The primary objective of a corporation, and hence of its directors, has been and still is only to maximize profits and shareholder value for shareholders.  (ALI Principles of Corporate Governance)  In contrast, our European counterparts follow a “stakeholder” model whereby corporations must recognize their interdependence with suppliers, labour, banks, government and all others who have a “stake” in the enterprise.  Under this European model, the board of directors is chiefly responsible for monitoring managerial performance and achieving an adequate return for shareholders.  (Organization for Economic Co-operation and Development Principles of Corporate Governance) 

 

            As recently as this year, our multinational corporations continued to bristle at the idea of any government intervention into their rights of “free enterprise” and self governance.  Laws like the Sarbanes-Oxley Act were viewed as expensive acts of officious intermeddling in what were essentially private affairs.  It was asserted to be a private matter of contract—a view that was subsequently upheld by our courts—that the New York Stock Exchange could pay Dick Grasso $190 million for acting as chairman of an eleemosynary organization.  It was asserted to be a private matter of contract that the giants of the lending industry could charge consumers twenty to forty percent interest on credit card debt.  And yet no one has deemed it proper to ask whether the rules and principles that worked so well in those quaint and slower-paced days of the seventeenth, eighteenth and nineteenth centuries fit the demands of the twenty-first century:  a century where the 100 largest of our behemoth multi-national corporations have revenues that, if called “gross domestic product,” would have each of them ranking in size between the thirty-third and the ninety-sixth largest countries in the world.

 

            Then, and of a sudden, the market forces of “creative destruction” that the captains of industry lauded as vouchsafing for the integrity of the capitalist system took their hold, and these giants began to stumble and fall.  We began to hear cries of “too big to fail” and how the survival of these institutions was so intertwined with the very stability and financial health of our society, that unlike consumers or all other small to medium enterprises, it was a matter of governmental priority that they be bailed out, and that their losses be borne by the public.  AIG, Citigroup, Goldman Sachs Group, JPMorgan Chase & Co., Wells Fargo, GE Capital, and others, and now General Motors, Chrysler and Ford lined up at the public trough for monetary sustenance. 

 

            I do not argue that such assistance is not now prudent.  Clearly, the essential, intrinsic part of our basic economic structure that these institutions play requires their being healed.  But what I do ask, is that if they are so affected with a public interest, was that not also the case before they fell into trouble.  And if you answer that question in the affirmative, does that not mandate that such institutions should be required to serve all stakeholders, rather that merely those who from time to time buy their shares?

            The importance of a properly functioning governance system, both for bodies politic and corporate, cannot be overstated.  As noted professor Mauro Guillén of the Wharton School has pointed out, “a poorly conceived [governance] system can wreak havoc on the economy by misallocating resources or failing to check opportunistic behaviors.”  This current crisis was the result of both of those errors.

            In 1624, John Donne presented us with the truth that a society is at its best and its worst, an integrated whole.  In a certain sense, we are all partners in this American experiment; all men and businesses and corporations affect, benefit or diminish each other because they all are “involved in mankind.”  Is this not thus the time to cast off our blinders of greed and revisit our corporate governance system to recognize the interdependence that businesses have with all of us, and to constrain their decision-making accordingly?  When the giants began to die, “the bell tolled for us,” and we answered its call.  Should they not similarly be required to care for society’s well being in times of plenty?


© Richard L Wise and RLWise.wordpress.com 2009. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Richard L Wise and RLWise.wordpress.com with appropriate and specific direction to the original content.