Free markets and morality – AV Rajwade – Business Standard – 09 Feb 2009

A guiding principle, for even Adam Smith, was that of taking pleasure in the happiness of others

A couple of developments in the last week or two manifest how political the issue of compensation in financial services has become in the West. President Obama described the $18 billion bonuses paid by the Wall Street for 2008 as ‘shameful’ and as ‘the height of irresponsibility’, when the industry was being bailed out with billions of dollars of tax payer money; and its excesses are throwing millions out of work all over the world. (He has since proposed a ceiling of $500,000 for top executive compensation in banks getting government money.) A particularly embarrassing disclosure was the fact that John Thain, chairman of Merrill Lynch, now a unit of Bank of America, recently spent more than a million dollars to do up his office, including $1,400 for a waste paper basket, and $35,000 for a commode: It must be smelling out of this world! (Merrill also rushed through bonuses of $4 billion before declaring a loss of $15 billion in Q4). The sad part is that there does not seem to be any sense of contriteness or humility on the part of these “Masters of the Universe”. They seem to take it for granted that bankers have a (God-given?) right to be much better off than the rest of the world — irrespective of what contribution they make to societal welfare. One top executive of a financial services firm which has received a huge bailout, said in a panel discussion in Davos, that the money was pumped not to save his firm, but to mitigate the possibility of a systemic failure. Is it that an extended period of huge, sometimes obscene, level of compensations has altogether removed finance professionals from ground realities? John Gapper ( Financial Times )recently criticised them for “behaving like the 18th century (pre-Bastille) French aristocracy”. Even The Economist ,that most consistent propagator of free markets, was constrained to ask last week: “What will it take for bankers to show a little remorse?” A few more billions — or lynching mobs? The issue has the potential to damage irrevocably society’s trust in bankers.

The John Templeton Foundation has recently come out with a compilation of a series of essays, titled “Does the free market corrode moral character?” The answers range from a straight negative (Jagdish Bhagawati) to “maybe” or “it depends” (John Gray, John C Bogle) to “yes”. The last answer was best articulated by Michael Walzer of the Institute of Advanced Studies, Princeton, who said, “Competition in the market puts people under greater pressure to break the ordinary rules of decent conduct and then to produce good reasons for doing so. It is these rationalisations — the endless self-deception necessary to meet the bottom line and still feel okay about it — that corrode moral character.” Restraints on economic power are very weak; the countervailing power of labour unions has been greatly reduced; the tax system is increasingly regressive; the regulation of banking, investment, pricing policies, and pension funds is virtually non-existent. The arrogance of the economic elite these last few decades has been astonishing. And it stems from a clear-eyed view that they can do just about anything they want to do. That kind of power, as Lord Acton wrote years ago, is deeply corrupting. Bernard Henri Levy, the French philosopher, agrees (“The mad rule of money, and materialism as the measure of all things — in short, the free market, released from all rules and governed only by the greed of the most powerful — fatally corrodes our souls.”), but also argues that “The communist or the fascist corruption through the negation of the market is significantly deeper, deadlier, and more irreparable than the first.” George Orwell would certainly agree! The issue is also acquiring a religious dimension. The Bishop of Munich, Reinhard Marx, has recently come out with his version of the other Marx’s Das Capital , which endorses markets but calls for return to a socially responsible model of capitalism (To my mind, Sweden is in many ways the best example of this). Even the Pope recently described the financial crisis as the “triumph of greed”, warning humanity against ignoring the vastness of gaps between rich and poor, individuals and countries.

In fact, Christianity and Islam have frowned upon making money from money: Islam proscribed interest and Christianity bans usury: Not just extortionate interest rates but also buying an asset “in order that he may gain by selling it again unchanged (i.e. without any value addition)”, i.e. speculation. Jesus Christ is probably far closer to the so-called “liberation theologists” than the “Christian right” in America.

To quote from Adam Smith, (The Theory of Moral Sentiments , incidentally a book the Chinese Premier carries everywhere) “How(soever) selfish ….man may be supposed, there are certainly some principles in his nature which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing except the pleasure of seeing it….The chief part of human happiness arises from the consciousness of being loved.” Clearly, the pioneering market economist had another side to him!


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