Category Archives: markets

The Hesitant Hand: what Adam Smith did and didn’t say about government regulation, corporate lobbying, and CSR

Ethics for Adversaries has been on spring break, but should be roaring back to life in the coming days.

Here’s a newish book I’ve just ordered on the history of Adam Smith’s Great Idea — the one that still frames so much of our thinking about the ethics of deliberately adversarial institutions. (Steven G. Medema, The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas.)

I just hope the book is better than the first line of Princeton University Press’s blurb, which seems at best skewed and revisionist, and at worst just false:

“Adam Smith turned economic theory on its head in 1776 when he declared that the pursuit of self-interest mediated by the market itself–not by government–led, via an invisible hand, to the greatest possible welfare for society as a whole.”

It is well-known that the famous phrase “an invisible hand” (not even “the invisible hand,” which is what we tend to say now) was used only once in the massive two-volume Wealth of Nations. It comes in a chapter railing against Restraints on the Importation of Goods. Much of the chapter concerns what we would now call the law of comparative advantage — that is, about why it is to each country’s advantage to produce what it can produce most efficiently, and to trade abroad for what can be produced more efficiently in other countries. Throughout the chapter and the book Smith points out the myriad ways restrictions on international trade create inefficiencies. And also how these restrictions inevitably come from business people lobbying gullible or corrupt politicians in order to secure domestic monopolies.

But not only is it inefficient to restrict imports of goods produced more efficiently abroad, it is usually unnecessary. Business people prefer to keep an eye on their investments and to be able to trust the people they deal with, so they will naturally, even other things not equal, invest domestically. As Smith says in the famous “invisible hand” paragraph,

“As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own gain, and he is in this, and in many other cases, led by an invisible hand to promote an end which was not part of his intention.”

He is talking about a particular case, and criticizing a particular type of government regulation, namely, what we would now call protectionism. He notes that this basic logic of the market replicates itself “in many other cases.” He does not say “in all other cases.” We know, for example, that the invisible hand will get all messed up in situations that involve collective action problems like the Prisoner’s Dilemma. Adam Smith would have had no reason to object to that (and I suspect that a real Smith scholar could point you to his discussions of PD-like situations). And he wouldn’t think that the general welfare would necessarily be increased by trade involving deceit, the exploitation of what we now call information asymmetries, or negative externalities.

It is also noteworthy, given the wording of the Princeton University Press blurb, that he does not say that self-interest via the invisible hand leads to “the greatest possible welfare of society as a whole.” In the “invisible hand” paragraph he is talking about “the annual revenue of every society [which] is always precisely equal to the exchangeable value of the whole annual produce of its industry.” That is, something like GDP. It is obviously an open question whether GDP tracks the “welfare of society.” Even the British Conservative Party doubts that assumption these days!

Once again, I’m no Adam Smith expert, but I have actually read great swaths of the Wealth of Nations, which is more than most latter-day “disciples” of Smith can claim. It is somewhat odd that the enduring lesson from that monumental work is the panglossian one that markets, left to their own devices, always lead to the best of all possible worlds (since that is not what Smith ever says), rather than Smith’s repeated warnings that we should always be suspicious of corporate lobbying and corporate conspiracies.

The conspiracy part we do remember from the famous quote about how we should worry whenever members of the same trade meet, “even for merriment and diversion” since they will inevitably try to fix prices. That is why even conservatives support anti-trust regulation; even if they also tend to think it is unfair in almost any particular case. But just as relevant today would be Smith’s utter contempt for business people lobbying and corrupting hapless politicians in order to enact particular regulations that serve their interest more than the public’s. Smith was concerned with trade restrictions that create unnatural monopolies, but he would be just as worried today about lobbying to allow for the exploitation of other market failures in a modern economy. And he would have been horrified when the right-wing — supposedly pro-market — justices on the Supreme Court used the Citizens United case to make it easier for corporations to pursue their interests by manipulating election processes.

And while this new book is drawing our attention to the famous “invisible hand” paragraph, it is worth noting that Smith was no fan of Corporate Social Responsibility, or CSR, either. He continues the paragraph quoted above by noting:

“By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

Who needs trade unions?

So far on this blog we have not talked much about the choices between adversarial and non-adversarial relations inside of firms. But this is a great context in which to sharpen our understanding of adversarial ethics, because we do have experience with much more and much less adversarial corporate cultures and industrial relations.

The legal recognition and buttressing of labor unions from the late 19th century until, say, the 1980s, could be described in two ways: either as instituting deliberately adversarial mechanisms in the governance and management of firms, or as making an already-adversarial relationship between owners of capital (and their managers) and laborers less unfair. There are other ways of describing this contested institution, for sure.

We’ll talk much more about what goes on inside the firm in the future; but at this point I would just like to flag a brief debate going on in the blog space at The Economist. Mark Thoma, an economist at the University of Oregon, proffers a brief answer to the question “What good are labour unions?” His one-sentence answer is, “Governments should replace unions as a protector of workers.” And of course, in many ways they have. Government occupational health and safety legislation, along with extensive bodies of employment law, now give to all workers what unions had to bargain tooth-and-nail for on behalf of their members.

But however important unions may have been in the past (and for Thoma this is an open question), he argues that:

In an increasingly globalised world where digital and other technology allow firms to easily escape unionised labour, unions have lost their ability to act as an equalising force in negotiations over wages and benefits.

Global labor organisations could provide an alternative, but this would require global institutions that do not presently exist, and that do not look likely to emerge anytime soon. For now, the answer has to come domestically and the only institution powerful enough to protect workers is government. Government-provided health and dental care, security in old age, workplace safety, insurance against job loss, higher education that is essentially free, and other such benefits would go a long way toward remedying what workers have lost since the 1970s. In addition, government redistribution of income may be needed to ensure that economic gains are shared more equitably. In combination, this would provide the things that unions fought to get for workers and maintain the current social protections that government provides.

There seems to be a general trend to make more institutions adversarial, competitive, or “market-like.” Ed Sullivan got people to watch singers and dancers on TV, but now we won’t watch them unless they’re competing against each other and we can vote on who wins. But here is a proposal to make one very important economic and social institution — the firm — less adversarial. Or maybe just less fair.

Adversarial ethics under the stars: competitive time-wasting in K-Ville

This is the inaugural post by Leonard Ng’eno and Michael McCreary.

Hours before this year’s basketball showdown in Cameron Indoor Stadium between consummate rivals Duke and University of North Carolina Chapel Hill, the chancellor of UNC—Holden Thorp—took an early swing at the Blue Devils by tweeting, “Our students are talking about the future and asking smart questions instead of wasting time sitting in a tent.”[1]

The Krzyzewskiville tradition involving hundreds of Duke undergraduates camping out for weeks in advance to get their single-square-foot claim on courtside real estate for one of the most highly anticipated events in all of sports has become iconic of both the institution and fandom at large.  Duke fans, or Cameron Crazies, are known for their intensity and are proud to serve as the “Sixth Man” on Duke’s squad, providing an added advantage for the home team which is soundly reflected in the record books.  As Duke undergraduates, we were obviously offended by Thorp’s cheap shot at our tradition, our team, and our friends, but after the initial sting began to fade we started to wonder: Was Thorp right?  Is spending a month in a tent in order to see a premier basketball game a waste of time?

We’ll let K-Ville residents speak for themselves as to whether or not their month outdoors was worth their while this year; the specific questions we wish to address are these: What is the function of K-Ville?  What are its shortcomings?  And is there a preferable alternative?

The necessitation of K-Ville comes from the foundational economic principles of supply and demand, where supply represents the limited number of seats available and demand represents the number of undergraduate students vying for those seats.  This excess demand creates the need for some filtration process to achieve equilibrium.  In effect, tenting at K-Ville serves as a kind of “price adjustment” mechanism, increasing the cost (not monetary, but physical) of attendance and as a consequence lowering the demand.

K-Ville, and lining up in general, functions from a deliberately adversarial point of view where many students are competing against one another for a limited number of seats.  The principal shortcoming of K-Ville is that very few students—including the ones who participate—enjoy sleeping out in the cold while concurrently paying for a nice, heated room: grades suffer, relationships are strained, and comfort is sacrificed.  Yet, it is K-Ville residents themselves who dictate their own fate.  Living in a tent is not, strictly speaking, a requirement of attending the game.  Admittance relies on a “first-come first-served” policy, and K-Ville residents are merely admitted because they are the first in line.

In this way, we can see how lining up poses a serious collective action problem; one which, according to Professor Joseph Heath, “can easily degenerate into a race to the bottom, in which each individual, responding to the actions of the others, generates an outcome that is successively worse, but where each iteration of the interaction only intensifies their incentive to act in the same way.” While lining up early may be in one’s own self-interest in order to guarantee a spot, the inherently competitive move prompts others to line up earlier as well and can eventuate into months of waiting for hundreds of students.  On the other hand, if the amalgam of attendees turned up just an hour before the game, the result would be the same as if they had lined up in the same order months ago.

The primary problem in dodging this race to the bottom, however, is that there is no way to know who would commit to lining up first without going through the process genuinely (i.e. with every intent to sleep there for the entire duration).  It could be conceived that one year K-Ville residents decided to form a pact, after completely intending to stay there the whole time, that said they would each get in line in their set order an hour before the game and avoid camping out.  However, problems with this solution would be that there would be no way to prevent others from lining up during that time or to ensure that signatories of the pact would not break their oath.  Furthermore, such an agreement would, to some extent, undermine the legitimacy of the next year’s line, as some might line up with an expectation to make another pact while some might not line up at all, thinking that they could just outwit the people who make the pact this time around.  In essence, there doesn’t seem to be any way to artificially generate and ensure the results of the natural queuing process.

To tackle this problem, we need to reduce the demand for seats by setting up a fair competition that does not lead to a race to the bottom.  In arriving at our proposed solution, we took as a premise that a fair competition is one that favors those who want to go to the game the most (i.e. those who are willing to pay the highest price).  This premise is not only founded upon common marketplace ideas, but also seems to be the source of legitimacy for the existing queuing system.  Thus our method was to find some competitive system that would allow the most devoted students to demonstrate their fanaticism by paying a more productive and fun cost than standing in a line.  By definition, costs are rarely productive or fun (you aren’t going to reduce demand by giving people free candy), and so it took some thinking to come up with something, but in the end we were pleased with our solution.

We propose setting up a competition based on attendance of other Duke Athletics events.  Those who have attended the most Duke games, of any sport, would get priority for the seating to men’s basketball games, including the marquee matchup with UNC.  The university already has a system in place that rewards students for attending sporting events, called The Inferno.  We suggest that The Inferno be expanded to not only give points to students for attending games, but also to reward students with game seats when demand is expected to exceed supply. Thus by basing admittance to the Duke-UNC game on a student’s attendance at other Duke games, we avoid the race to the bottom result that forces students to camp out for longer and longer periods each season in order to attend one game.


[1] Thorp has since taken down the tweet and apologized.

Should we be Worried When Competitive Arenas Compete with Each Other?

[Ed. Note: This is the debut post by founding member, Dominic Martin.]

The Deutsche Boerse announced this week that it was in advanced talks to buy NYSE Euronext in a deal that would create the world’s largest stock market.

And by complete coincidence, on the very same day, the London Stock Exchange Group (LSE) had also announced that it would merge with the TMX Group Inc. (who owns the Toronto Stock Exchange). Both of these mergers (Frankfurt-New York and London-Toronto) are presented as a necessary measure to compete with other stock markets at the international level.

So here is a big question. If competition is justified within properly regulated and self-contained competitive arenas, should it also be justified, at a “meta-level,” between these arenas themselves?

My intuitive answer is … yes.

Because competition already goes on at many different levels: corporations compete against each other (obviously), but also, in other ways, with their suppliers and their customers; consumers compete with each other over products that are scarce (houses, for instance, or art), and even national markets compete with each other to attract investors, increases their exports, and so on. What is a tax haven, if not a competitive national economy that plays “dirty” at that game? (Or so say highly taxed and less internationally competitive economies, like Canada or France.) Competition among stock markets also contributes to the dynamic that makes rivalry desirable in the first place.

However, a few things have to be kept in mind regarding the London-Toronto stock exchange merger:

  • What Canadians will gain, in terms of stocks volume, they will lose in terms of control over their own national stock market.

Even if LSE CEO Xavier Rolet is seeking to reassure Torontonian financiers, and even if the Canadian authorities will require some guarantees that TMX won’t lose all its sovereignty in the merger, the fact remains that the bigger player is the LSE. It will hold 55% of the share of the new corporation. It will occupy eight seats at the Board of directors, compared to seven seats for TMX. What will happen when UK’s financial interests conflict with Canada’s? To ask the question is to answer it.

In 2008 TMX acquired the Montreal Stock Exchange. Let’s just say that Montreallers’ interests would now be even further down the food chain.

  • If you are out in the market of stock markets, ready to merge with another player, why not go after the biggest one?

The TMX-LSE merger will create the biggest stock market in the world in terms of subscribers, but only the second in terms of market capitalization. The first one being the New York Stock Exchange (now I let you do the math if NYSE Euronext is acquired by the Deutsche Boerse). So why didn’t the TMX try to merge with that group? Shouldn’t Canadian’s benefit ever more from that transaction?

The fact that the stock markets owned by TMX and LSE specialized in similar product might be an acceptable rationale, however. Once taken together, the London and Toronto stock exchanges will become the biggest market for merchandise, natural resources, energy, and small- and medium-sized businesses in the world.

  • Did they really have a choice? And if not, what does the TMX Group should be accountable for?

Technological development (that allows decentralization of transactions) and the integration of world-wide economies (that increase the size of markets and corporations) have pushed many stock exchange to merge since 2000. Some like to say that these mergers are unavoidable (see Professor Louis Gagnon’s comments in the Globe and Mail for instance). If it is the case, does it wave all obligations for the corporations that own these stock markets? Ought they to promote their respective national interests?

 

Conference Announcement: Property, Markets, and Morality

At least since the publication of Adam Smith’s An Inquiry into the Causes of the Wealth of Nations in 1776, most discussions on the foundations of political economy have been about the design of a very important deliberately adversarial institution we call “the market.”

Here is an announcement for a conference on some of the philosophical and ethical issues at the heart of capitalism (so to speak), taking place in my neck of the wood.

PROPERTY, MARKETS, AND MORALITY

18-20 March, click here for an early schedule.

University of North Carolina Greensboro

Speakers:

Hillel Steiner (University of Manchester), “Greed and Fear”

Richard Arneson (UC San Diego), “What is Wrong with Working for a Boss?”

Daniel Russell (Wichita State University), “Capabilities, Redistribution, and Ownership”

Michael Munger (Duke University), “Euvoluntary Exchange and the Difference Principle”

Julian Lamont (University of Queensland), “University Education, Economic Rents, and Distributive Justice”

Commentators:

Eric Mack (Tulane University)

Geoffrey Brennan (UNC Chapel Hill / Australian National University)

Jonathan Quong (University of Manchester)

Daniel Shapiro (West Virginia University)

Bas van der Vossen (UNC Greensboro)

This symposium is hosted by the philosophy department at the University of North Carolina Greensboro and the BB&T program in Capitalism, Markets and Morality.

All welcome. Attendance free, but registration required.

To register and for more information, please contact Bas van der Vossen: b_vande2@uncg.edu

Organic Farmers “Cheating”

Any time standards are established for the production of some product, and if money can be made by skimping on those standards…well, skimping is liable to start happening. Nowhere is that worry more obvious today than in the realm of organic agriculture.

See this little note from The Morning Sentinal: ‘Cheating’ organic farmers mostly from overseas

The brunt of the problem is with overseas farmers who sell much of the certified-organic food in the domestic, American and Canadian retail markets. Who’s watching them? Well I’ll tell you. for the most part, they’re watching themselves. And they undercut American and Canadian organic farmers like Thoet four times out of five.

Clearly, if people in China, Mexico and Indonesia are cheating, we need to start field testing on a surprise basis to weed them out. I’m not sure why exactly that message bothers some organic farmers, like Thoet, but the good news is that the overwhelming majority of organic farmers in North America agree completely….

Notice here the multi-layered competition:

  • American organic farmers are competing with each other;
  • American organic farmers are competing with with American non-organic farmers;
  • American organic farmers are competing with foreign organic farmers (or maybe “organic” farmers);

It’s also worth noting that, perhaps less obviously, American organic farmers are competing with American farmers who adhere to a “nearly organic” method of farming, but who do not or cannot meet the standard necessary to gain the regulated designation “Organic.”

In each case there’s a competitive environment, subject to a more-or-less formal set of rules; and in each case, the opportunity exists to break rules, or to game them in various ways. Notice also that, when one sees oneself as playing several separate games at once, one has in principle the opportunity to justify cheating at one game by appealing to the rules of the other games. (For instance, “Yes I know I was bending the rules for USDA Organic, but it’s more important that we beat out imports from Indonesia!”) Does this happen in practice?

(See also: The Challenges of Organic Certification, over at my Food Ethics blog.)

Skins and the Edge of Indecency

Last week there was some controversy over MTV’s “edgy” teen drama, “Skins.” I’m quoted giving a business-ethics perspective on the show in this story, by the NYT’s David Carr: “A Naked Calculation Gone Bad.”

What if one day you went to work and there was a meeting to discuss whether the project you were working on crossed the line into child pornography? You’d probably think you had ended up in the wrong room.

And you’d be right.

Last week, my colleague Brian Stelter reported that on Tuesday, the day after the pilot episode of “Skins” was shown on MTV, executives at the cable channel were frantically meeting to discuss whether the salacious teenage drama starring actors as young as 15 might violate federal child pornography statutes.

Over at my Business Ethics Blog, I focused on the way the Skins controversy serves as an example of how a kind of corporate group-think can end up producing a product that might, on second thought, not be such a good idea.

But it’s also worth noting (for purposes of this blog) that TV is fiercely competitive. Viewers generally benefit from that competition, as in any industry, but there are limits on competitive behaviour. What are the relevant limits, here? TV is relatively loosely regulated. The Federal Communications Commission does regulate TV (see their rules here) but their main focus is on avoiding ill-defined “indecency.” But their process has to begin with objections from someone in the community. And what we take to be “indecent” is surely evolving, a fact that broadcasters are both subject to and contributing to. Something more like “bright line” might be found in child pornography laws, the spectre of which has been raised in the controversy over Skins. But even there, there’s plenty of room for interpretation, and plenty of room for broadcasters, in a competitive game, to play along the edges of the rule.