Time to Stop Playing Business and Focus on People

Profit and People

Please excuse a short excursion into this dilettante's version of economic theory to begin this post.  I do this in an attempt to declare the rigorous intellectual foundations for our economy as it is and for where I believe our economy must go.  In both cases the underlying economic theory is market based and Capitalist. I am a Capitalist. This post is about Capitalism.

Wealth Maximization is currently American Capitalism’s dominant ideology. Wealth Maximization was first described by Richard Posner in 1979 (Utilitarianism, Economics, and Legal Theory), as an economic theory concerned with maximizing social welfare.  In Posners own words, “wealth maximization provides an ethically attractive norm for social and political choices”.  His second essay in 1985 (Wealth Maximization Revisited) is more interesting because he directly addresses his critics who disagree that wealth can be an ethical or a normative value.  Posner’s claim that it can is based on a trend in economic theory to see economics as a march towards being a hard science like physics and away from a social science like sociology. Posner’s wealth maximization theory is the extension of a school of economic theory that has focused on the mathematical ideas of utility and efficiency. Posner claims a strong connection between wealth and happiness and he claims that market mechanisms can govern wealth (and therefore happiness).  While Posner is careful to describe what he means by wealth, utility, happiness and efficiency it has not stopped business actors from reinterpreting his theory and replacing his nuanced idea of wealth with the very simple idea of profit - wealth maximization begat profit maximization.  Essentially, Posner’s careful wordsmithing is ignored and the presence of profit becomes de facto evidence of an efficient and ethical economic activity.  Posner’s carefully constructed Wealth Maximization becomes the rapacious Capitalists justification for profit maximization.

Countering Posner’s Wealth Maximization theory is a school of economics that builds on the math of Economics while providing a rigorous explication of human behavior in the context of the choices we make in our economic lives.  At least two nobel prize winners of economics come from this tradition - Daniel Kahneman and Elinor Ostrom. In the late 1970’s Kahneman and others began to build the new theory of Behavioral Economics that pays close attention to the psychological aspects of consumer choice.  Ostrom focused on the idea that the tragedy of the commons is not an immutable law but instead a flawed and cynical theory.  Ostrom demonstrates that private ownership is often not the best way to manage a common pool resource and instead, stakeholders can self-organize and manage the resources they need to have sustainable livelihoods.

Behavioral Economics, in its inclusion of the vagrancies of human behavior, does not fall into the trap of oversimplification that plagues wealth maximization; however, implementing economic systems based on the vagrancies of human behavior is far more difficult than designing economic systems that use the simple math of profit to understand efficacy.   My basic thesis is that we need to redesign our economy to move away from an understanding of profit as a proxy for success to an economy that considers equity and individual agency as a proxy for success.

I first encountered the term “agency” in the context of international development. Agency boils down to the capacity to pursue your livelihood. It is a quintessentially Capitalist ideal.

Freedom to choose becomes freedom of opportunity when people have the capacity to act on choices. This depends on their assets and capabilities, as described by [Amarta] Sen (1985) and in the ‘sustainable livelihoods’ Framework promoted by DFID in the first half of the 2000s. The framework distinguishes five types of ‘capital’ — financial, physical, natural, human and social — that provide the capacity to follow a chosen livelihood strategy. - Small Producer Agency in a Globalised Market

The Wealth Maximization paradigm is the justification for the idea that money is speech and corporations are people and the Behavioral Economics paradigm is logically opposed to this. The reification of wealth as inherently ethical designates wealth engines as inherently ethical and market transactions as integral to ethical behavior. Therefore corporations are super-people who are powerfully ethical.  All of this assumes free-market and non-corrupt behavior which is another problem with wealth maximization, it incentivizes corruption.  From the Behavioral Economics lens, markets, businesses and financial transactions are choices or tools through which we humans exercise our agency.

When we examine economic activity from the wealth maximization lens we tend to look at consumption and GDP.  From every corner this approach has been declared flawed. I believe a more informative approach is to examine examine consumption or the ability to consume as an outcome of work and that work should be the defining aspect of Capitalist behavior. (No, I am still not a Socialist.) Here are two very interesting quotes about work from Adam Smith and E. F. Schumacher.

The man whose whole life is spent in performing a few simple operations, of which the effects, too, are perhaps always the same…has no occasion to exert his understanding, or to exercise his invention, in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become…. [He is incapable] of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging. 
- Adam Smith, Wealth of Nations (via Debra Satz, Some Things Should Not Be for Sale)

And from Schumacher...

The Buddhist point of view takes the function of work to be at least threefold: to give a man a chance to utilize and develop his faculties; to enable him to overcome his ego-centeredness by joining with other people in a common task; and to bring forth the goods and services needed for a becoming existence. Again, the consequences that flow from this view are endless. To organize work in such a manner that it becomes meaningless, boring, stultifying, or nerve-racking for the worker would be little short of criminal; it would indicate a greater concern with goods than with people, an evil lack of compassion and a soul-destroying degree of attachment to the most primitive side of this worldly existence. Equally, to strive for leisure as an alternative to work would be considered a complete misunderstanding of one of the basic truths of human existence, namely that work and leisure are complementary parts of the same living process and cannot be separated without destroying the joy of work and the bliss of leisure.
From the Buddhist point of view, there are therefore two types of mechanization which must be clearly distinguished: one that enhances a man’s skill and power and one that turns the work of man over to a mechanical slave, leaving man in a position of having to serve the slave.
-E.F. Schumacher, Buddhist Economics (via Maria Papova, Brain Pickings Blog)

I have always been fascinated by how much of our collective moral structure is built under the rubric of work - that work is where meaning and purpose comes from.  The wealth maximization paradigm defines work solely and exclusively as an activity for which one gets paid - the fact of payment infers meaning. In the two quotes above, the first from none other than Adam Smith counters the popular understanding of Smith as posthumous justifier of free markets.  To Smith, meaning comes from the nature and purpose of work and the individual’s contribution and context relative to the task.  More importantly, the individual’s agency in the context of work - her ability to choose - is the focal point, not the fact of payment for services rendered.

Pitchforks and Pendulums

Nick Hanauer in a letter on Politico to his fellow .01%ers

The most ironic thing about rising inequality is how completely unnecessary and self-defeating it is. If we do something about it, if we adjust our policies in the way that, say, Franklin D. Roosevelt did during the Great Depression—so that we help the 99 percent and preempt the revolutionaries and crazies, the ones with the pitchforks—that will be the best thing possible for us rich folks, too. It’s not just that we’ll escape with our lives; it’s that we’ll most certainly get even richer. … the fundamental law of capitalism must be: If workers have more money, businesses have more customers. Which makes middle-class consumers, not rich businesspeople like us, the true job creators. Which means a thriving middle class is the source of American prosperity, not a consequence of it. The middle class creates us rich people, not the other way around.

The pendulum has swung from a world where a New Deal and a Great Society were good ideas to one where debilitating inequality, racial re-segregation and ideological ignorance, are good ideas. What I particularly like about Hanauer’s Politico article is that the current swing of the pendulum is hurting everyone: “These idiotic trickle-down policies are destroying my customer base.”  Evidence of this idea/threat/specter that the pitchforks are coming can be seen across the political spectrum from the Occupy movement to the Nevada ranchers. 

Explicating the difference between these movements is interesting but for now the point is that the level of frustration and anger in consistent across the spectrum. And most importantly, history has shown us that we are capable of better. In our history we have seen that the pendulum can swing to the other side - the side that favors humanity.

I believe that while our differences on social issues are real, they also obscure our opportunity to find common cause. Imagine the classic political spectrum as a line that stretches from left to right - from liberal to conservative.  Now pull the two ends together and spin the resulting circle to draw a sphere. In that sphere live us. In that sphere lives the tired and overwrought spectrum of social issues but also a spectrum from a gilded plutocracy to an engaged democracy and one masks the other.

Building Agency: Education, the Media and Social Mobility

Give me a lever and a place to stand and I will move the earth. - Archimedes

The solution to the problem is well know. We must separate money from politics. Unfortunately the people with money like their privileged political position. The greatest failures of the great American experiment have been with our government.  All three branches are have played a role in the exaltation of wealth but the Legislative and more recently the Judicial branch have built the greatest barriers to individual human agency.  However, if American’s awake from our stupor as described by Smith and Schumaker (above) and find common ground on the backside of the circle we can exercise our diminished and atrophied but still powerful right as citizens of a Democracy.  In the short term we need to dismantle the legislative artifice that is propping up the wealth maximization system.  Lawrence Lessig’s MayDay.us movement is one great example of something we can all do now.  He is building a Super Pac to end all Super Pacs to “elect a congress committed to fundamental reform by 2016”.  This is a movement that the left and the right can join regardless of our differences on social issues.

"I know no safe depositary of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion by education. This is the true corrective of abuses of constitutional power." --Thomas Jefferson to William C. Jarvis, 1820

In order for our democracy to function we must have a functioning education system. There is considerable, often asinine and probably eternal debate about content and pedagogy but the most troubling deterioration is in basic financial and political support. The American Dream is impossible without education. Education is essential infrastructure of a Democracy but across the country education funding is being cut and it is being done in ways that are inequitable and therefore damage our ability to reap the benefits of the productivity of our citizens in the future.  ProPublica, an exceptional media outlet in a sea of not exceptional media outlets, has a fantastic series on the re-segregation of our schools and the Office of Civil Rights for the US Department of Education has done extensive research to document the extent of this re-segregation. Support for education is not an issue that cuts across the right ← → left political spectrum but we have let the social issues divide us instead of finding common ground as citizens on the backside of the circle.

Education is a long term issue. It is always hard for a politician to provide more than lip service because you can’t see quantitative results in less than 8 years. To support education or any long term issue you need: 1)  good data, 2) impartial analysis, 3) intelligent and responsible opinions.  This is where the media has failed us and it is also where we have failed ourselves. We have given ourselves over to the gravity of emotionally laden opinion without requiring that those opinions are based on quality data and impartial analysis. The media has failed by devolving to the lowest common denominator and becoming purveyors of baseless opinion instead of the aspiring to fulfill the essential role of the fourth estate. Fear and vitriol are the most common ploys used to buy eyeballs in the Internet age. There is a way out of the morass that we are in.  It won’t be easy.  It will take a long time.  We will have to move incrementally and we will need good data, impartial analysis AND intelligent, responsible opinion.

I will end this post by recommending an excellent and exhaustive study on social mobility in the United States. The study discovers that “contrary to popular perception, economic mobility has not changed significantly over time; however, it is consistently lower in the U.S. than in most developed countries”. This is of course different than saying inequality is not increasing.  It is very well documented that inequality is increasing it is just that the the changes in mobility have happened in a very small group of people at the very top of the curve - the fabled 1%.  Additionally, the study delves into a state by state comparison where there are dramatic differences in social mobility and these differences can be seen through the lens of 5 specific community characteristics.  The best way to get a good sense of nuance is to read the study (fair amount of statistics you can skim over or you can read the executive summary). This article on Slate does a good job of summarizing but if you don’t like the progressive slant of Slate, then take a look at this Brookings report on creating an office of social mobility which references the report extensively.

The 5 community characteristics that are most likely to be correlated with social mobility are:

  1. Segregation - communities with diverse neighborhoods have higher social mobility rates.

  2. Inequality - communities that are integrated across economic diversity as well as communities with a substantial middle class are more likely to have higher social mobility rates.

  3. K-12 Education - Communities with higher test scores, lower dropout rates and smaller class sizes (as well as a higher tax base from which tax revenue comes to fund schools) have higher social mobility rates.

  4. Social Capital - Communities with “higher fractions of religious individuals and greater participation in local civic organizations” have higher social mobility rates.

  5. Family Structure - “Finally, the strongest predictors of upward mobility are measures of family structure such as the fraction of single parents in the area. As with race, parents' marital status does not matter purely through its effects at the individual level. Children of married parents also have higher rates of upward mobility if they live in communities with fewer single parents.”

These five characteristics provide a way to understand what policies need to be put in place to build equality of opportunity - to enable agency in all of us.  

We get to where we need to go if step into ourselves and claim the power given to us by our democracy.  But to do that, we must focus on finding common purpose - we must compartmentalize our disagreement on Right ← → Left issues and come together on the backside of the circle where we can build a coalition to serve humanity and build agency in ourselves and our children.  In this way we can take back the ground that we have lost.