Let's Reason

About 3.4 miles off the western coast of Turkey, in the eastern Aegean Sea, there lies an island.  For its forested mountains the Hittites called it Lazpa.  The Greeks who came there over 3,000 years ago pronounced its name Lesbos.  These days, Lesbos is also known as Mytilene, its capital city.  In antiquity, Greeks and Romans knew Lesbos because of its poets, its people of letters, and its olive trees.  Nowadays, people around the world recognize its name because of the thousands of refugees, who fleeing the wars of the Middle East and Afghanistan, crashed drenched, frightened, and uncertain on its shores.  The image of a little boy swept dead on the Turkish shore across Lesbos still epitomizes the human drama of seeking a new home away from home.

It’s not, however, the mark Lesbos left on the early years of the 21^st century the only reason I want to write about this island.  It’s more than that.  Coincidence or fate has made Lesbos relevant to our lives like few other places.  Connecting the dots of the history of Lesbos, even though one dot was not consequential for the next, is a story worth telling.

The dots start with the birth of Sappho around 630 BCE.  The ancients called her The Poetess for the beauty of her lyric poetry (the only female to be called that just like Homer was the only male poet to be called The Poet).  Along with her compatriot Alcaeus, Sappho was recognized as one of the nine greatest poets of ancient Greece.  Some called her the tenth Muse.  Her lyricism inspired many, including Roman poets and, much later, European writers once she was discovered again in the 16^th century.  The passion of her poems, especially when she rhapsodizes of female characters, made her the first poet of female homoerotic love.  That’s where Lesbian came from.  Very little of her poetry survived the vicissitudes of human history.  Here is the last stanza of her Ode to Aphrodite:

“Come to me once more, and abate my torment/  Take the bitter care from my mind, and give me/ All I long for/  Lady, in all my battles/  Fight as my comrade.”

Sappho was not the only great poet from Lesbos.  In 1979, Odysseus Elytis, whose parents hailed from Lesbos, was awarded the Nobel Prize in literature.  Those who have sailed across the Aegean will recognize these islands in Elytis’ verses: “Ios, Sikinos, Serifos, Milos/  Each word and a swallow/  To bring you the spring amidst the summer”.

In the centuries between Sappho and Elytis, Lesbos became host to another great.  Aristotle arrived in Lesbos in 344 BCE and stayed there for two years.  There, the lagoon in the bay of Kalloni became Aristotle’s laboratory for the study of its aquatic and aviary life.  One of the species was the cuttlefish.  Aristotle dissected this and many other species, describing their anatomy and the functions of their organs.  Beyond fish and birds, Aristotle studied mammals, including humans.  His methodology for classifying animals into genuses and species was surpassed only by Karl Linnaeus’ taxonomy in the 18^th century.  In his book The Lagoon the biologist Armand Marie Leroi (of the Imperial College of London) offers a fascinating account of Aristotle’s observations, methods, and connections of his work to modern zoology and biology as well as the theory of evolution.  As modern scientists do, Aristotle raised many research questions and, following a system of logic, gave answers that were insightful, albeit often erroneous or half-right.  He wrote “nature makes [animal] instruments to fit the function, not the function to fit the instrument”.  In other words, he understood that animals must be fit to survive their environment.  He wrote that off-springs inherit their species and traits from their parents.  Thus, he understood that procreation is the passing of genetic information from parent to off-spring.  He did not go as far as to understand the role of adaptation in evolution, but he wrote that differences in species are gradual – or that nature evolves in small steps.  Armand Leroi argues that Aristotle came tantalizingly close to grasping natural selection as the evolutionary mechanism in the development of life.  It’s not too much to claim that Lesbos is the place where biology was born.

Lesbos would continue to be remembered only for Sappho, Aristotle, and its connection to Elytis if it were not for the Arab spring, the rise of fundamental Islam (ISIS) and the Afghan war.  It was the confluence of these conflicts that broke all hell loose. In just 2015, over a million refugees crossed the Mediterranean toward Europe.  Of these, 800,000 came to the Aegean islands across Turkey, with the majority landing on Lesbos.  We all know the scenes of despair, bravery, and tragedy that unfolded as worn out men, women, and children tried to survive on rickety boats and make it to the shore.  In an epic journey of hardship, sorrow and endurance these hundreds of thousands of refugees made their way to the Greek mainland and by various means to the lands north of Greece, seeking to ultimately reach Germany and other affluent European states.

While hundreds of volunteers from all over the world converged to Lesbos and other islands to help the refugees, the dark side of human nature reared its ugly head as hostile nationalist sentiments rose in European countries.  One after the other, Slovenia, Hungary, and Austria closed their borders to the approaching refugees.  In Greece, the far-right party Golden Dawn found a new foil for its supporters.  Austria saw the rise of the nationalist Freedom Party while Hungary saw further consolidation of power in the hands of its undemocratic nationalist prime minister Viktor Orban of the Fidesz party.  Even in Germany, the Alternative for Germany (AfD) party attracted enough voters to raise a strong anti-immigrant voice and challenge Chancellor Angela Merkel.  The same in France and the U.K.  In this country, a presidential candidate launched his campaign by promising to seal the US from those criminal hordes of immigrants passing through the southern border.

Human migration is not easy.  Not for those who leave their homes or for those who see them before their homes.  But how we think of and treat immigrants and refugees is a test of our society’s character.  Humanitarian crisis is our failure to treat refugees humanely.  It is not our failure to keep them away.  Last October, Greek Coast Guard Lieutenant Kyriakos Papadopoulos was given a hero’s funeral for having saved 5,000 refugees from drowning in the Aegean.  And a few weeks ago, Dionysis Arvanitakis, a baker in the island of Kos, was memorialized at his passing for feeding the refugees. These and countless others understood human dignity.

That’s the story of Lesbos.  A legacy of poetic lyricism, scientific curiosity, and human strife for dignity.

I had finished writing my last post when Amazon announced that it was pulling out of its plan to open a corporate campus in Queens, New York.  What followed was an exchange of accusations and counter-accusations that came to echo the theme of that post about views that favor job creation over other interests.  In this case, the interests that felt aggrieved by the generous concessions to Amazon were those of the community living around Amazon’s future location.  The practice of government concessions to influence corporations and other organizations (like sport franchises) as to where to move their operations is well entrenched in America.  This practice raises, however, some inconvenient questions that are worth exploring, especially at a time when the debate about the roles of private and public sectors seems to be intensified.

First.  Why do firms ask (or even demand) concessions to choose a place for their operations?  Aren’t the other intrinsic location factors (like well-trained labor force, good educational institutions, efficient justice system, reasonable regulations and taxes, quality of life, and safety) enough?   Or is it that the prospects of making a profit aren’t strong enough so a firm needs concessions to turn an unprofitable business into a profitable one?  If it’s the first case, corporations appear to be greedy.  It looks like they practice corporate giving in reverse.  They place themselves at the receiving instead of the giving end.  If it’s the second case, the concessions granted by local governments enable firms to apply resources to businesses with questionable or perhaps negative economic value.  Neither possibility is desirable.

Two.  Why are local governments willing to grant concessions to attract firms?  Is it because they sense they cannot compete in locational advantages (like those mentioned above) and use concessions as the only competitive tool?  If this is the case, the practice of relocation concessions can very well enable a local government to systematically ignore the long-run development of its community.  Isn’t then that community right in demanding a more direct attention to its interests so that it develops a sustainable future?  Can the dedication of resources and time to develop sustainable locational advantages be a viable policy if business can be attracted through occasional concessions?

Three.  Negotiations on concessions are done on a case-by-case basis.  Hence, they are transactional.  They may favor some firms over others.  Thus, they may undermine long-term loyalty and long-term relationships with businesses.  These deals resemble marketing promotionals which promise new customers a preferential price while old, loyal customers pay higher prices.  Relocation concessions can also distort firm competition.  How can we justify this potentially distorting role of government?

Four.  Choosing to go to the city or state that grants the biggest concessions is no different than choosing to go to the country that has the most advantages for businesses, be it in the form of lower taxes, looser laws and regulations, cheap labor or absence of labor unions.  If relocation within a country based on concessions is a good thing for business, can we condemn firms for relocating or sourcing services abroad?  In both cases, the firms’ motives are the same: bring down the cost of business and increase profits.

In fact, the practice of government concessions to influence location decisions is an ideological orphan.  Advocates of pure capitalism consider them to be an unwarranted intervention of government in the domain of markets and private enterprise.  Liberals, on their side, consider them government handouts, a sort of corporate welfare.

Of course, those who believe that the main priority of an economy is to create jobs, whether the incentives originate with the market or the state, have no qualms about government concessions to attract business.  But their  cries of “job killers” to the opponents of such concessions cannot be done in the name of unfettered capitalism that disdains government interference in the economy.   Liberals are not free of ideological conundrums either.  They have to explain their rules and principles in relation to attracting businesses and jobs in their communities.

And for all of us, the relevant question is:  If local governments have a useful role to play, what are the fair rules of competing for businesses and jobs?  How can we avoid a “beggar thy neighbor” game?  Who has the right to be at the table of negotiations?

What is going on?  Is the US moving from capitalism to socialism because of Bernie Sanders and his acolyte Alexandria Ocasio-Cortez?  And what about going all the way back to 18^th century mercantilism the Trump administration seems to favor?

As I have written in a previous post, the American economic system is anything but pure and unfettered capitalism.  It’s a hybrid of capitalism and elements of socialism.  That was settled some 80 plus years ago with the New Deal legislation of the FDR administrations.  We got Social Security as well as the National Housing Act that made home financing affordable through government sponsored agencies that are still with us.  We also got a host of regulatory agencies that regulate trade, commerce, and the capital markets.  Nixon added the Environmental Protection Agency, and Johnson bested him with the Medicare, Medicaid and other safety net programs.  G. W. Bush expanded Medicare to cover drugs and Obama added the Affordable Care Act.  Since the late 1940s the employer-sponsored health insurance has been subsidized by not collecting taxes on that part of labor compensation.  Bailing out the Savings and Loan Associations industry in the 1980s and later the whole financial system along with GM and Chrysler in 2008-2009 brought the hybridization of our economic system to even a higher level.  And, surprise, surprise, we also have a sort of basic income in the form of the Earned Income Tax Credit to assist lower-income people.

In addition, the government is in the business of producing basic and applied research and supporting numerous research centers.  It is thanks to government involvement in space exploration (NASA) that a private industry of rockets and satellites has sprung up.  The internet with its transformative innovative extensions was also funded by the government in its nascent stages.

The above programs reflect the pragmatic view that for all its advantages and benefits capitalism needs oversight and assistance from government.  Private initiative is not willing or capable to meet all society’s needs and markets can fail or inflict harm without some regulation.  Not every American is fully aware of the hybrid nature of our system but overwhelming majorities are happy with these programs, especially Social Security, Medicare and Medicaid.   Not only that.  We now have a new political reality.  Socialism is no longer a dirty word.  Although Americans favor capitalism by a wide margin, they are warming up to socialism.  An August 2018 Gallup poll showed that 51% of Americans ages 18-29 are positive about socialism vs. 45% who are positive about capitalism.  Interestingly, the one thing both Democrats and Republicans associate mostly with socialism is that it promotes fairness (Sept. 2018 Gallup poll).

The fact that Americans understand socialism as a fairness-enhancing system has to do a lot with how capitalism has been abused to benefit the few.  Capitalism is quite a flexible system that comes in several versions.  Over the past 30 years, the version of capitalism favored by conservative thinking in the US is what I like to call paternalistic capitalism.  Democrats call it trickle-down economics whereas Republicans give it a respectable spin by calling it supply-side economics.  It can be summed up as follows:  A society is made up of job creators and investors on one side and all the rest on the other.  Job creators need to have freedom from regulations and labor restrictions (like labor protection laws and unions) and above all pay low taxes.  When these conditions are met, the job creators will hire workers, produce and sell a lot of stuff, and even pay good wages.  If, under this arrangement, the business/investor class gains disproportionately more is of secondary importance as long as all others also get something.   Therefore, the proponents of this arrangement view it to be a win-win solution.  Except that it doesn’t work like that.  The record shows that absent regulations, workers and consumers are often abused and tax relief to the wealthy and businesses does not necessarily translate into investment in factories and R&D or into higher wages.

The idea that the economic well-being of a society primarily depends on the financial strength and enterprising initiatives of existing and aspiring job creators is just an economic dogma reflecting the political choice and power of one group.  It doesn’t even accord with true capitalism.  A sustainable economy needs both the demand side and the supply side to operate efficiently.  The paternalistic version of capitalism instead espouses that government policies should systematically be geared toward privileging the supply side by all means.  Exhibit A of this dogma is the 2017 tax law.  With the economy near full employment at that time a tax stimulus was hardly needed.  What was sold as a tax reform instead turned out to be a tax bonanza to already very well-off people and to corporations.

The second reason why capitalism is losing the people’s faith is the increasing income and wealth inequality.  The success of an economic system is not judged only by its ability to produce wealth but also by its fairness in distributing wealth.  Psychological experiments show that humans are not merely content to gain something from some arrangement.  They also want to feel they are treated fairly.  It is understandable then why Americans feel that the type of capitalism they experience does not work fairly for all and, hence, they perceive socialism to be fairer.

However, as we worry too much about the intrusion of socialism, Mssrs. Navarro, Lighthizer, and Trump are working hard to turn us back to 18^th century mercantilism.  Mercantilistic policies favored exports and restricted imports in order to produce positive trade balances that augment the gold reserves of the country.  France stuck too long to this policy and eventually lost out to England.  Likewise, the current administration’s fixation on bilateral trade balances risks ignoring other vital developments that will matter more for the well-being and global standing of the US.

Coming back to the mix of capitalism and socialism, or the roles of private and public sectors, we need to recognize that we face a complex and uncharted future of serious challenges.  Technological advancements, Artificial Intelligence, environmental sustainability, climate change, and biotechnology are some of them.  We have no idea how efficiently and fairly the private sector can handle these challenges.  Our success in navigating these and other challenges will depend on how smartly we use our private and government resources to solve human problems and not on the degree of purity of our economic system.

In 1998 the group of the top ten corporations in terms of market capitalization (market value of all shares) included four firms operating in the digital economy (Microsoft, Intel, IBM and Lucent Technologies).  In 2018, there were five of them and most importantly four (Apple, Microsoft, Amazon and Alphabet (Google)) occupied the top four positions.  Only three of the top ten firms had operations that could somehow fall in the traditional old-economy sectors of chimney stacks or brick and mortar firms.   This is one way to understand the new structure of the economy.

There is, though, another more interesting dichotomy that has serious implications for employment and incomes.  This is the dichotomy between high-technology and low-technology sectors.  The importance of this dichotomy comes from the fact that technology intensity is closely related to productivity (value of output per worker); and productivity is in turn related to the level and growth of wages.  This point was brought home again in an informative article by Eduardo Porter in the NYT (2/5/2019).  The data, drawn from businesses operating in Phoenix, AR, show the gap in wages between low-technology/productivity sectors on one hand and high-technology/productivity sectors on the other.  There is no reason to doubt that this split also exists across the US economy.  For example, Porter’s article shows that in 2017 a person working in the accommodation and food services sector received an average weekly wage of $420 whereas a person working in the information sector earned an average weekly wage of $1,450.  The latter worker’s productivity was 6.22 times that of the former.

As we would expect, when technology plays a lesser role in the production of products and delivery of services, firms need to hire more workers (i.e., more hands like sanitation workers or brains like educators).  The opposite is true in the high-technology/productivity sectors.  The result is that a lot more people are employed in low-technology sectors than high-technology sectors.  This implies that when we hear that employment rises and unemployment falls the opportunity to earn relatively high incomes is not the same for all new hires.  Since a lot more people are hired in low-technology/productivity sectors where wages are lower, that depresses the overall average growth of wages.  And this explains why despite the emergence of new professional fields with high wages, the majority of Americans are not enthusiastic about their earnings.

Not only high-technology/productivity sectors employ fewer people they also have a serious barrier to entry for aspiring workers:  they require high-skill sets that come with advanced education (at least a bachelor’s degree or specialized technical vocational training).  The data show that college graduates (whether white, Hispanic or black) make twice or more the income of non-college graduates within each demographic block.  The insufficient career preparation of white non-college workers (that comprise the white working class) and their resentment against educated elites is not actually helping them to escape low-wage jobs.  And any politician’s pledge that he/she will restore the good old wages of working-class people is either ignorant or an outright lie.  No politician can affect the productivity of a sector when productivity is related to the nature of the job and the technology intensity that goes with it.

And there is more bad news for less-educated working-class people.  Firms are moving fast in adopting technologies that displace low-skill workers.  You may have read a NYT (1/26/2019) article “The Automation Agenda Hidden by the Davos Elite” which reports that although executives are loath to declare the move to technology (for fear of upsetting their workers) in reality they are doing exactly that.   The above-mentioned Porter article also reports that academics now fear that the expectation that technology and Artificial Intelligence would help create enough jobs at good wages to replace those lost to technology is no longer justified by the recent data.  Therefore, the concern of mostly white working-class Americans that they lose wages to immigrants is misplaced.  The real culprits are technology advancements and lack of the requisite skills that force these workers to low-productivity and, hence, low-income jobs.

What should then be done?  Thoughtful experts recommend that the government must play a greater role in assisting working class people to retool for the thriving sectors of the economy.  Besides college education, support and promotion of vocational education in fields needed in the knowledge-driven economy are extremely important in that connection.  There is a big difference between being willing to escape the low-wage economy and not being able to do so for lack of means or social support that local and federal government programs can provide.  Sending the unemployed coal miners of West Virginia and Kentucky back to coal dust filled mines leads to a life of precarious health and uncertain employment future.  Sending them to computer and robotics classes is the right thing to do if we truly care about them.

The bi-furcated economy we face raises a number of political questions.  If indeed the increasing application of technology does not lift all boats and a non-trivial fraction of workers stagnates in low-wage sectors, is this healthy for the social cohesion of the country?  If we fail to train more American workers for the technology-intensive jobs, who will fill the gap?  The obvious answer is that we need to have a policy to attract foreigners with the needed skill sets.  Currently, we seem to go backwards in this respect.   On the other hand, if we succeed to train a lot more people for the technology-intensive sectors, who will fill all those low-wage but necessary jobs?  This points to the need for an immigration policy that welcomes workers from less developed countries.  Since American low-wage jobs still pay a lot better than low-wage jobs in underdeveloped countries, this is a win-win solution.

Economic trends in technology utilization, employment needs, and labor incomes suggest that we need to have an informed debate about their consequences instead of exploiting these issues to advance narrow political goals.

In the mid-1980s, Great Britain seemed to be a lot more confident about its potential and future.  At least that’s what was reflected in the policies adopted by its Prime Minister, Margaret Thatcher.  With her faith in market-based economics, she privatized big state companies, like BP, and then, with her “Big Bang” deregulation of capital markets and the financial services industry, she showed that Britain was ready to compete on a global scale.  Indeed, London became an early beneficiary by quickly becoming a world-class financial center, ready to rival New York’s Wall Street.

The fact that traditional, centuries-old, investment banks, were taken over by American and continental European financial institutions did not seem to raise particular anxiety.  After all, as a result of London’s internationalization, multitudes of professionals in law, finance, accounting, and other ancillary fields added to London’s economic vitality and heft as a cosmopolitan financial heavyweight.  London’s growth was also evident in its fast-changing skyline as new glittering buildings were added to house international firms.  Similarly, the Great Britain of the 1990s had no problem of welcoming the excess labor force of less developed European Union countries after the adoption of the Maastricht Treaty that opened up the labor market in the EU.  Great Britain and London, in particular, became the destination for talented and ambitious young professionals from all over Europe.

But then, a decade into the 21^st century Great Britain started to lose its nerve.  On one hand, the financial crisis of 2008 was pushing more displaced Spaniards, Portuguese, Greeks and other Europeans to seek work in England.  On the other, a more disturbing development to many British people was the influx of Middle East refugees into Europe as a result of the wars in that region.  The passport-free crossing of the channel by non-European, mostly Muslim, migrants became the bete noire of fringe right-wing groups before it metastasized in more politically correct language to mainstream segments of the population.  Around the same time, the EU rules made in Brussels also started to leave a bad taste in the mouths of British politicians that should know better as to how a multi-national union was supposed to work in order to keep its cohesion.  In short, politicians and people of influence, many of whom had come out of the elite schools that until a century ago had graduated those who ruled over Pax Britannica, all of a sadden turned against internationalization.

There is a historical irony in this closing of the British horizons in the minds of the British, especially its elite.  Throughout the colonial times, the British were active in subjugating other people, rearranging their lives, destroying traditional social and political structures, and introducing new customs and cultural norms.  But the moment these former colonial masters realized that they themselves ran a real or fantastical risk of having their lives been impacted by foreigners, be it the rule-makers of Brussels or European workers or Asian and African migrants, they dug the moat around fortress Britannica by approving the Brexit.  The up-to-that time internationalization of their frontier was now the threat.

Lest I am unfair to the British people, let me add that the same irony applies to Western Europe as well as to America.  Western Europe, starting with the Crusades and continuing with the colonization or outright conquest of new lands played an immense role in upsetting the lives of people from the Americas to Far East Asia.  Western Europeans spread their religion, customs, culture, political institutions and so much more, besides spreading deadly diseases.  Whether the spread of European influence and hegemony were beneficial or not is besides the point.  The lives of so many people were changed by European colonizers and settlers most often against the will of the local population.  Now people from these same lands are coming to Europe, not as armed invaders, but as desperate migrants attracted to Europe’s success and peace.  All of a sudden being exposed to other cultural influences, to this reverse direction of globalization and multiculturalism, annoys to say the least, or even worse, raises nasty nationalist sentiments that feed the ranks and the clamor of right-wing parties across Europe.

We see the same historical irony in contemporary America.  Sometimes by military and other times by political means, we have interfered in the domestic affairs of foreign people, most frequently those of Central and South America.  Just like earlier generations of Europeans, Americans believed their engagement in the affairs of others were for the purpose of setting up a better world order.  But there is no denying that our interference impacted other peoples’ lives when many of them would rather be left alone to sort out their mess.  Central to America’s message as it engaged in global affairs was convincing others about the benefits of economic opportunity and the right of people to free and safe living.  Many of these people realizing that neither was possible in their countries kept coming knocking on our borders eager to pursue the goals we preached to them.  But now we want to raise walls to keep them out.  Having been responsible for changing the lives of others, we are now afraid of any change they may mean for us.

Being honest with our historical past means we recognize that we are often those who set in motion the forces that now bedevil us.  Those who see foreign people as a menace to their lives, from a political, cultural, or religious standpoint, ought to realize that that was the threat we posed to them in the name of global and cultural expansion.  Grasping our historical interaction with other people should inform every European and American citizen that showing tolerance to those whom we brought into our own world of global order is the least we can do to save our honesty.

In my previous post I wrote that firms may not necessarily be run by managers in ways that reflect the interests of the shareholders, and this separation of control from ownership can lead to sub-optimal economic outcomes.  Here I will argue that the current trend of statements by politicians, commentators and even business leaders regarding the mission of firms has a high risk of missing the mark and moreover create adverse consequences that could erode the role of government and the balance between manager-controlled corporations and the public, in addition to causing economic inefficiencies.

Here are some examples that feed this controversy.  Larry Fink, head of BlackRock, a huge wealth management firm, has admonished business leaders to take a leadership role in public affairs, be it of social or political content.  David Brooks, as I previously mentioned, laments that economic priorities have overtaken social priorities in the decisions of corporations.  Microsoft recently announced the commitment of $500 million to mitigate the high-cost of housing in Seattle.  A Deloitte survey found that millenials overwhelmingly chose “improve society” as the goal of firms.

To assign the duty of social responsibility to firms is fine, but it also needs clarification.  Firms do have a socially responsible purpose and this is to meet human needs by producing honest products and services and selling them at fair prices.  From getting a haircut to getting a life-saving medication we rely on small or large enterprises we generically can call firms.  Making a profit is only a condition for a firm to stay in business and remunerate those that provide its capital.  Unless we start with this purpose in mind, we risk taking our eyes away from ensuring that firms deliver the products and services they promise and compete fairly in setting prices.

What about, however, other priorities, like supporting charities, civic associations, cultural institutions, education, research?  That is, how about using the firm’s money to support the community and society at large?  That’s where the difficulties start?  Who has the right to make these choices?  The managers or the shareholders?  In an often-cited article published in the NYT in the 1950s, the late economist and Nobel Prize winner Milton Friedman argued that managers should concentrate on making profits and let the owners decide on how they wish to use (or not use) their profits for social causes and charities.  Friedman’s suggestion makes sense.  Managers cannot tell what charities or social causes all shareholders favor.  Therefore, managers should abstain from using firm resources for such ends and instead let each individual shareholder decide for him/herself.  Besides, managers may direct firm resources to charities and causes that build social capital for the manager without necessarily creating commensurate benefits for the firm or the shareholders.

No matter how honest firms may be in regards to their products and prices, their operations can have adverse consequences on their communities.  Concentration of firms in an area may drive housing costs up, congest traffic, pollute the environment, even invite criminal activity.  These are what economists call negative economic externalities.  Don’t firms have an obligation to bear some of the public cost of these externalities?  This is the question asked by E. Tammy Kim (NYT 1/19/19) in discussing Microsoft’s commitment to alleviate housing costs in Seattle.  Her suggestion of levying a tax to defray the cost of corporate negative externalities may sound controversial but it’s a good start in addressing the impact of large corporations on the quality and cost of living.

In the same newspaper Emily Badger worries that if we accept types of initiatives like that of Microsoft’s as the new model of corporate giving, we risk transferring core public sector responsibilities and policy decisions to corporations.  This not only erodes the scope of government, it can also undermine the principle of democratic representation.  Besides shareholders whose social or political priorities may not be fairly represented by managers, voters as well can be frozen out of the process of deciding how various community problems ought to be resolved.  Take this model to its logical extensions and we may very well end up with a corporatist governance.  Again, the main concern is not whether corporations should have a role in shouldering public costs, but what form the cost sharing should take, as, for example, in the form of taxes, with public sector institutions maintaining authority over the decision-making process.  As with Milton Friedman’s suggestion, let corporations operate in their business sphere (i.e., produce, sell, make profits, pay taxes) and let governments take care of public problems.

The 2010 Supreme Court decision on Citizens’ United, which recognized free speech rights to corporations, is also pushing corporations toward actions outside their business sphere.  The concern here is not about the legal validity of the decision.  It’s rather with the opportunity the case opens for corporations to interject themselves in the electioneering process under a corporate governance model that potentially allows political speech to reflect the views of managers rather than those of shareholders.

Although shareholders as owners of the firm have the ultimate right to decide how its resources are used, giving primacy to the voice of shareholders does not necessarily solve the problem of fair representation in decisions of social or political engagement by firms.  Today, the vast majority of public shares are held by institutional investors, like pension and mutual funds, trust funds (of universities and other non-profits) and hedge funds.  The shift from individual to institutional stock ownership means that these institutions may not vote in the interests, economic or political, of the owners (i.e., us) of the stocks they manage.   Increasingly, the power to make or affect corporate decisions that go outside the business sphere rests with a shrinking pool of decision makers.  And yes, individual shareholders can mount efforts to have their voice be heard but this can be often done at a prohibitive cost.  And lest we forget, many voters are not shareholders.  How are they represented in the social and political decisions of firms?

As this discussion shows, the call for corporate social responsibility outside a firm’s business is fraught with problems and challenges that can impact economic prosperity and the political process.

All my academic life I taught finance courses or what we often call “bean counting” courses, difficult to relate to lofty ideals.  But when I would first meet each new class, I strove to find some inspirational words to link their effort and lives to the bigger world as a way to motivate them to do their best.  In one such opening class, as I was trying to find this bigger theme, I told them to be dreamers and to dream big no matter how challenging the dream appeared to be.  And then without much thought I told them “think what a collection of bold and challenging dreams were those that Martin Luther King proclaimed that summer day on August 28, 1963.”  It is a whole different experience to listen the “I Have A Dream” delivered with King’s thunderous and commanding voice, but reading the words delivers the same powerful message.  Here is that section of the speech:

… I still have a dream. It is a dream deeply rooted in the American dream.

I have a dream that one day this nation will rise up and live out the true meaning of its creed: “We hold these truths to be self-evident: that all men are created equal.”

I have a dream that one day on the red hills of Georgia the sons of former slaves and the sons of former slave owners will be able to sit down together at the table of brotherhood.

I have a dream that one day even the state of Mississippi, a state sweltering with the heat of injustice, sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice.

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today.

I have a dream that one day, down in Alabama, with its vicious racists, with its governor having his lips dripping with the words of interposition and nullification; one day right there in Alabama, little black boys and black girls will be able to join hands with little white boys and white girls as sisters and brothers.

I have a dream today.

I have a dream that one day every valley shall be exalted, every hill and mountain shall be made low, the rough places will be made plain, and the crooked places will be made straight, and the glory of the Lord shall be revealed, and all flesh shall see it together.

Much progress has been made in matters of race but more remains to be done.  On this Martin Luther King day, let’s not only remember his words; let’s contribute to making his dream reality.

When policy pundits and politicians are frustrated with corporate America, their typical foil is the “shareholder culture.”  By that they mean that shareholders compel managers to serve shareholder interests at the expense of other stakeholders, including employees, customers, suppliers, and the community at large.

For example, last November, NYT columnist David Leonhardt wrote that in the 1970s managers decided to adopt shareholder value maximization as a corporate mission and as a result all kinds of bad things followed after that.  The truth is that in the 1960s managers had engaged in a value-destroying spree of corporate acquisitions in the belief that conglomeration was a more profitable strategy than focusing in a few related business lines.  Academic research, both theoretical and empirical, has shown ever since that the “empire building” strategy actually destroys economic value for shareholders and the society at large.  Educated by these findings active shareholders pushed executives to pay more attention to value.  They have done this by selling off shares of underperforming firms and/or bidding for equity stakes large enough to enable them to exert enough influence over or even to oust directors and executives that waste resources.

Last week, another NYT columnist, David Brooks, wrote “But these days corporations see themselves as serving one purpose and one stakeholder  – maximizing shareholder value.”  First, we should have the courage – no matter how difficult and controversial it has become these days – to say that there is nothing wrong (given certain caveats) with creating value for shareholder.  Unless the buyers of corporate equity (stock) are not compensated for the time value of money (i.e., the interest rate that they could otherwise receive on bank deposits) and the risk they take by investing in businesses with uncertain payoffs, there would be no equity capital to fund firms.  Neither financial theory nor best practices in corporate management teach or support that the interests of the shareholders are in conflict with the interests of other stakeholders.  Corporations (as all firms) generate more value by producing good products and services and expanding their markets.  They can undermine both if they try to shortchange their employees, creditors, customers, suppliers and their communities.  A firm can serve well all these stakeholders and still pursue value maximization through economic efficiency and successfully meeting the needs of consumers.  We have numerous examples of corporations that ran afoul of the law or the trust of customers and other stakeholders and saw their reputation and value suffer.

The more important question to ask is: Do corporations pursue value maximization objectives in order to meet the expectations of shareholder while treating fairly the other stakeholders?  To answer this question, we need to look at the structure of the modern corporation.  The shareholders as contributors and owners of the equity capital are given the right to run the firm.  The shareholders elect a board of directors, which then appoint the CEO.  Both the directors and the CEO act as agents, that is, as representatives of the shareholders and, by law, they have the fiduciary responsibility to act in the interests of shareholders.  In practice, this structure gives directors and managers effective control to run the corporation in ways that may not always be consistent with value creation.  Why is this so?  Because no one shareholder can monitor the actions of the CEO and hold him/her fully accountable.  To do so it takes significant resources, expertise, and time.  Someone like Warren Buffet can do it; but not you or I.  In practice, the rest of us rely on our pension funds, mutual funds, and activist investors to ensure managers and boards protect our interests as shareholders.  This separation between ownership and control has been recognized by Berle and Means since the 1930s.

Why do we need protection from CEOs?  Because if they only receive a base salary, they have a personal interest to also accumulate various expensive perks (like a private plane, generous car and travel allowances, etc.) with the cost of these perks coming out of the shareholders’ pockets.  More importantly, CEOs may avoid business decisions that could create value but could also threaten the CEO’s tenure or compensation.  The solution to this so-called “agency problem” is to give CEOs (as well as directors) shares of the corporation or options to buy such shares so that their financial interests are better aligned with the pay-offs of the shareholders, which are dividends and stock value appreciation.  This trend started in earnest after the 1980s and with the aggressive push of executive compensation consultants has led to the astronomical executive compensation packages of our days.  There is no credible theoretical or empirical support as to whether the extravagant CEO compensation packages are truly warranted, which speaks to the power of top executives.

One source of this power is the influence American CEOs have in the selection of the individuals who serve on the board of directors.  Furthermore, American CEOs almost invariably serve as chairs of their boards.  Thus, they control both the agenda and the dynamics of board deliberations.  It takes a lot of courage and conviction and often a lot of CEO malfeasance for an individual director to go against a failing CEO.  And even when CEOs are let go, they go with outrageous financial packages as a severance consolation even when they deserve to be fired.  Think about it.  In what other job, employees demand extra compensation in order to do their work as warranted by the employment contract?  As a British executive compensation expert once quipped, only in America executive income is called “compensation” instead of the English term remuneration as if American executives are told to do such thankless work for which they have to be compensated!

The truth of the matter is that American CEOs consistently resist rules that give shareholders a stronger voice and restore their right to act as full owners.  If corporate America needs improvement in its corporate governance is in regards to making corporate decisions more democratic rather than to diluting shareholder rights vs. those of managers.  Although there is more to this story, condemnation of the “shareholder culture” while ignoring the powerful role and lack of full accountability of executives fails to steer us toward the truly relevant issues.

Note:  Part II will address some of these issues.

More evidence is coming out that Americans are split in their views about climate change on the basis of their political affiliations.  Recent polls, nonetheless, show that more Americans recognize the reality and the consequences of climate change than in the near past.  Despite this trend, climate-related opinions are only slowly being translated into political action or adoption of energy-efficient solutions.

Better clarity in the climate debate requires to identify the areas of controversy.  First, is there climate warming?  The evidence about the warming of the climate over a long period of time, especially following industrialization and more particularly over the last few decades, seems to be scientifically strong and broadly accepted, though, there are doubters.  What causes this warming is a subject of a more intense controversy.  Is it due to human action or is it a natural phenomenon?  The answer to this question is important because if the cause is the former, then we can find ways to reverse it; but if it’s the latter then we can do nothing or very little. Currently the majority of climate scientists place the blame on human activity.  Finally, the third controversy focuses on what it takes and whether we have the political will to dedicate resources to address climate disruptions.

Survey results reported in “Politics and Climate Warming” by Yale University in 2018 show that 73% of the Americans in the sample believe that climate warming is real with 95% of liberal Democrats siding with this view versus 68% of moderate Republicans and 40% of conservative Republicans.  A majority of Americans (59%) also believe that climate warming is caused by human activity.  Again, more Democrats believe this to be so (up to 84%) than moderate Republicans (58%) or conservative Republicans (26%).  Finally, 63% of the respondents indicated they worry about climate change with more Democrats than Republicans expressing concern.  Importantly, more Americans were concerned in 2018 than just the previous year 2017.

What the Yale survey reveals to be the most promising finding is that majorities of Democrats and Republicans support a variety of policies to address adverse climate developments.  These policies include promoting renewable energy, tax rebates for those adopting energy-efficient solutions and products, and limits on carbon dioxide emissions and coal-fired power plants.  The same majorities also would like to see the US stay in the Paris Climate Agreement.

Nonetheless, there is a cautionary note that emerges from the survey.  When it comes to translating these views into political priorities and actions, actions fail to match opinions and the cause is political affiliation.  Specifically, only a minority of Republicans view climate issues to be a high priority and even fewer of them are willing to put pressure on politicians. Even among Democrats, only 54% of them indicated that they translate climate views to political action.  This then explains why despite the fact that a majority of Americans are concerned with climate change there is little action in Congress and government to address the problem.   It also explains why energy-efficient solutions have not been widely adopted by Americans.

A similar divide in views about the climate between Democrats and Republicans were reported by Pew Research in 2016.  That survey also shed light on another important question: how the public trusts scientists and scientific findings related to climate research.  On the question whether scientists should be trusted on climate issues, only a majority of liberal Democrats responded affirmatively whereas 39% of all respondents (Democrats and Republicans) responded negatively!  The interesting finding, though, is that outside climate research the American public believes scientists act in the public interest.  The Pew Research findings also show that the public blames the media for misreporting on climate-related issues.

The influence of political views on climate issues is best demonstrated in a study published in Perspectives in Psychological Science in 2018.  The researchers asked the participants to respond to questions about the climate first without linking a question to the position of either party (Republican or Democratic) and then by suggesting that a view was supported by one or the other party.  In the second set of questions, participants were clearly inclined to set their personal opinions aside and adopt the party line.

For comparison purposes, I looked up surveys regarding European views on climate issues and I found that majorities of Europeans are aware of and concerned about climate change with higher majorities in Western than Eastern Europe.  However, as in the US, action to adopt energy-efficient solutions are limited to a small minority.

The survey findings concerning Americans buttress the commonly observed phenomenon that once an issue becomes politicized rational and objective debate yields ground to party ideology and affiliation (the so-called tribalism).  Since American parties are strongly influenced by the lobbying efforts of business interests that have financial stakes in the outcome of the climate debate, it is difficult to see how parties will lead the public in a reasoned and evidence-based dialogue about this and other issues.  The thorniest problem will be apportioning the cost of addressing climate problems because it relates to the very political issue of income and wealth distribution.  As the “Yellow Jackets” movement in France demonstrated the lower and middle classes are not willing to bear the cost if they believe it will disproportionately fall on them.

The lesson for those of us who believe climate warming and change are real and primarily caused by human action is clear:  Move from opinion and belief to action.  Put pressure on politicians and adopt habits that reduce energy waste that adversely affects climate sustainability.  Start with the simplest of actions: “Don’t forget to turn off the lights!”

As a new year starts again, it’s a good time to look at the big picture of humanity’s progress.  One of my early posts highlighted several areas where humanity has made progress, including economic gains, health, and education.  In this post, I would like to point out another area where humans have advanced over the many millennia of their existence.  Namely, we have managed to expand the scope of kinship and empathy to include within our personal sphere of interest more and more previously alien and unrelated to us populations of humankind.

Humans are products of a long evolutionary process.  As with other animals, we are wired so that mothers and fathers care about the raising of their off-springs.  This allows the parents’ genes to survive and perpetuate.  But how do we then explain the sacrifice of a non-parental relative to save the life of a member of his or her kinfolk?  And how do we explain the sacrifice of an antelope that starts running around and ahead of an attacking lion to save the other members of the herd?  In 1963, William Hamilton, a British biologist, came up with the idea of kin selection.  Briefly, in order to survive, the genes of a species instill in its members the instinct of self-sacrifice.  The bearer of the gene may die but the gene itself survives and thrives in the surviving members of the species.  Thus remarkably, the selfish gene generates selfless behavior, that is, altruism.  In the sixties, another biologist, George Williams, argued that altruism could break beyond the barrier of strict kinship.

The philosopher Peter Singer in his book The Expanding Circle has also suggested that human compassion can expand beyond a group of related humans.  As an example, he refers to Plato who admonished his fellow Athenians not to enslave other Greeks in times of war.  Based on their covenant with Yahweh, ancient Hebrews also developed a sense of kinship across the people of Israel.  This is what Darwin had to say on the same topic in The Descent of Man: “As man advances in civilization, and small tribes are united into larger communities, the simplest reason would tell each individual that he ought to extend his social instincts and sympathies to all the members of the same nation, though personally unknown to him. This point being once reached, there is only an artificial barrier to prevent his sympathies extending to the men of all nations and races.”

The barrier Darwin and Williams alluded to is nothing else but the degree of our familiarity with other members of our species.  As I was mulling the thoughts for this post in my head, The NYT (12/29/2018) published a pictorial OP-ART piece by Henry J. Garrett.  It starts with the drawing of a rat’s head and the legend “Morality exists only because we evolved the capacity to empathize.”  Then in a series of drawings, Garrett tells the story of experiments in the U. of Chicago that have shown the following: (a) a white rat that had been raised among white rats did not save a black rat from a trap (I cannot help but quip here that this is the case of ‘I don’t give a rat’s ass’.)  Conversely, a white rat raised among black rats was indifferent to the danger faced by a white rat.  But even more remarkably, a white rat raised with white and black rats rescued rats regardless of their color.  The bottom line of these experiments is that altruism and empathy work best when we get to know members of our species that we would otherwise incline to categorize as “other” than us.

Coming back to our human story on earth, how have we done in this respect?  I believe, remarkably well despite lapses of indifference to the hardships of other humans and even lapses of brutality.   The more familiar we have become with other people the more interest we seem to show in their condition.  Our sense of kinship (in the broader sense) has expanded from the family level to that of the tribe, of the ethnic group, of the nation.  Of course, the path has not been smooth and without violence.  When encountered by the unknown and the other, our first instinct has been to dominate or even eliminate.  European explorers mistreated and often slaughtered indigenous people in the Americas and Africa.  People have killed and continue to kill others in the name of faith or ideology or territory.  However, since the Second World War humanity has striven to take a different course.  The Declaration of Universal Human Rights and the various international institutions set up by the UN have drawn peoples of the world together in the fight against human abuses, illiteracy, and diseases.  Agreements on climate and environmental sustainability are examples of the global sense that our species shares a common fate on this planet (in spite of the occasional doubters and disrupting actors that regrettably include the current US president).

Nonetheless, however cooperative and contributing to a mutual perspective of common problems these international set ups are, they would not be enough to generate the scale of empathy or kinship that Darwin and Singer had in mind.  What has brought us together is the phenomenal advances in transportation, telecommunications, commerce, news and nowadays social media.  It is these advances that have allowed millions of people to get familiar with other people over the past one hundred plus years.  Television news, newspapers, YouTube, and other social media make us aware of the strife, hardship, brutality, hunger, and sickness that people we never met may suffer in remote corners of the world.  Even more remarkably, we notice that looking at photos of the dead body of a migrant child washed up in the shores of Turkey, or the fleeing Rohingya, or the skeletal bodies of Yemeni children arouses our empathy as if these were our kin.  It is in response to the development of a more global perspective about our common bonds as a species that so many international organizations have sprung up in order to alleviate pain and foster wellbeing.  The Red Cross/Crescent, Doctors without Borders, Amnesty International, Oxfam, Save the Children, UNICEF, and so many more are examples of our broadening sense of kinship.

It seems that, like the rats in the U. of Chicago experiment, we humans also adapt toward a stronger feeling of kinship as we become more familiar with the “other.”  Nature and selfish genes can take us though only so far.  Now that we know what builds empathy, let’s continue to build the environment that promotes interaction and familiarity.  What draws us closer makes us a better species.