Mr. Bogle, There is a Flaw in YOUR Ethical System
It has become tiresome reading the multitude of blatherings about how the recent financial crisis is a failure of capitalism. John Bogle’s piece in Tuesday’s WSJ is particularly troubling.
The malfeasance and misjudgments by our corporate, financial and government leaders, declining ethical standards, and the failure of our new agency society reflect a failure of capitalism. Free-market champion and former Federal Reserve chairman Alan Greenspan shares my view. That failure, he said in testimony to Congress last October, “was a flaw in the model that I perceived as the critical functioning structure that defines how the world works.” As one journalist observed, “that’s a hell of a big thing to find a flaw in.”
What’s to be done? We must work to establish a “fiduciary society,” where manager/agents entrusted with managing other people’s money are required — by federal statute — to place front and center the interests of the owners they are duty-bound to serve. The focus needs to be on long-term investment (rather than short-term speculation), appropriate due diligence in security selection, and ensuring that corporations are run in the interest of their owners. Manager/agents need to act in a way that reflects their ethical responsibilities to society. Making that happen will be no easy task.
Four points come to bear on Mr. Bogle’s assessment:
- Whatever it is, it is not capitalism. Mr. Bogle, do you even know what capitalism is? It is nothing more than an economic system that permits the free association of individuals and their agents without special privilege. A corollary to that includes (the obvious) that it is a system that does not force associations between individuals that do not wish to associate. There is nothing in the “capitalist rule book” that requires corporations to exist, and certainly nothing that promotes their enormous accession of power and influence. In fact, rigorous competition in a truly free-association system would limit the influence any one corporation has over the rest of us. Furthermore, in a truly capitalist system, even if a corporation became very large – there would be no way for it to inflict damage unwittingly on non-participants unless a third-party intervened and picked my pocket to subsidize it, or to deal with it after it behaves badly. The problem corporations would die a painful and quick death – much to the detriment of their workers, shareholders, bondholders, and customers – but that is it. And by the way Mr. Bogle, there is nothing in the capitalist “rule book” that insistes that companies do not fail, there is nothing in there that assumes corporations or individuals are in fact virtuous or do the right things … rather, the only thing in the “rule book” pertaining to it is that people should suffer the consequences of their bad behavior.
To the point – there is no model of capitalism. So how can there be a flaw in the model? The flaw is in people’s belief that any organizational form is perfect. The flaw is in people’s mistaken belief that the world is not characterized by scarcity. The flaw is in people’s assuming that some other system can do better.
- Greed, “declining ethical standards”, bad behavior are forces of human nature. Neither are they endemic to a capitalist system nor are they new phenomenon. And gosh, if we take seriously the claim that ethical standards are declining, over the course of human history we must be at a point of zero standards … but I don’t see much evidence for that. Is Mr. Bogle the only person ethical enough to recognize all of our ethical flaws? Has he demonstrated that people’s ethical standards are lapsing? It is awfully expedient to point to the most recent crisis (and one that will be repeated, regardless of what system prevails) and say, “aha, that proves the system is flawed.” Of course all systems are flawed – no supporter of voluntary association suggests otherwise. But supporters of voluntary association (what Mr. Bogle deems evil “capitalism”) merely argue that competition harnesses these negative and avaricious forces toward the public interest far better than alternative arrangements. If you have a “third-way” where we try to take the “best of” capitalism and graft onto it some enlightened political interventions, these forces of greed, avarice and declining ethical standards will reveal themselves in more perverse manners. Water always flows downhill.
Quiz time: Who knows when this was written? “Our earth is degenerate in these latter days; bribery and corruption are common; children no longer obey their parents; every man wants to write a book, and the end of the world is evidently approaching” No, that was not Al Gore, it was an Assyrian tablet from 3000 years ago (apx. 2800 BC.)
- If you believe that when someone enters the mahogony paneled rooms and marbled floors of government, that they are able to be responsible and somehow change from being the people with declining ethical stanards and into some saintly figures, then I have some property to sell you in Antarctica.
- Related to point 3, why is it that any time there is a “crisis” in the world, people are always seeking to turn to government? Are there not other institutions that can be put in place to insure the fiduciary responsibility Mr. Bogle finds lacking? Back in the day, equity owners of financial institutions faced at a minimum double liability for the bad behavior of their firms. For example, when state banks were permitted to issue their own banknotes, any losses on the banknotes had to be paid for out of owner capital – two times over. Second, it used to be the case that financial institutions used to have charters that expired (note that having the political class grant a charter is a problem in the first place). So, every 10 years or so, corporations would have to be rechartered – and one part of the rechartering process would be making sure the company is still doing what it was permitted to do in its charter, and no more. Wouldn’t it profitable for Mr. Bogle to explore other institutional arrangements that might produce better outcomes than the current corporatist model has produced? I suppose that would not make him popular with the intellectual class now in power.
But beyond that, why is it that financial firms somehow need “to place front and center the interests of the owners they are duty-bound to serve” but that such problems are not endemic in others? Why does Wegmans not poison its customers and impoverish the Wegmans family that owns a majority of its stock? How is it that Nike or Adidas seems to make sneakers and sportswear that people are comfortable in? What allows financial corporations to be hijacked by the operating agents but other companies do not suffer from such a mishap? Without answering those questions Mr. Bogle, I would argue that it is not only disingenuous, but rather irresponsible to be proposing solutions to such problems – particularly when you yourself recognize that one of the “culprits” in this whole mess was the government itself. What has that institution ever done that was “fiduciarily responsible”? And what makes you so confident that this time government regulators will get it right, not be hijacked by special interests, and now use their newfound regulatory powers to unleash something far worse than the subprime crisis on us?
Read the piece here. When individuals face the consequences of their bad behavior, we enter the world of a fiduciary society. Why is it that I try to treat my wife and kids well? Why is it that I work hard to prepare for every class I teach? Do we need a federal statute to REQUIRE me to place my family and student’s interests ahead of my own when it comes to my familial and professional life? And if you say yes, we need rules to insure it, are you confident in the people writing the rules to know exactly what I need to do to treat my family well or to teach my classes better? And are you confident that the people writing the rules will not do so to improve their own condition? After all, if you believe that greed and lack of fiduciary responsibility is a flaw in mankind, then how come when you give those same people guns and the power to command others, suddenly the greed goes away, and suddenly we all become responsible fiduciaries? Ironic that a founder of a company that “manages” low-cost index funds would hold such a position, no?