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Greed is not for the Greater Good – Part IV

Wobbly Pillars are better than nothing – Regulatory Capture is not the answer

After the interlude when I wrote on insider trading, concluding that Insider Trading equals Theft, I realized that I had neglected to thank my fellow thinkers in different professions around the world, who have all contributed greatly to parts of this essay with their reviews, comments and confirmations, whether in agreement or not. I particularly want to thank Ken in Madagascar, Fawad in Oman, Odette in cyberspace and Martin in Singapore. Martin blogs extensively on financial risk management on his blog to be found on www.prmia.org/Weblogs/General/MartinDavies1/

During our discussions as documented in the previous parts of the essay, from different angles and professional backgrounds, we have come more or less to the conclusion that a free market without any rules is like a jungle. I also think we have a common sense that this is something we should try to avoid. Rules and regulations on the other hand, are artificial barriers to a perfect market and allow for artificial distortions to appear and there is a risk that these regulations will in themselves not have the intended consequence, which I would dub the "Law of Unintended Consequences" based on writings by Robert K Merton in 1936.

Echoing the previous parts of the essay examining the pros and cons of regulations, I recently did a thorough review of just one aspect of the Sarbanes Oxley Act 2002, with regards to Whistle blowing protection. Under the various sections of the Act, whistleblowers are supposed to be protected from harm to allow them to communicate breaches of a law to authorities which was seen as some of the most radical and far reaching commercial legislation introduced since the 1930's. The reality is that, for various reasons, the legislation is not having its intended effect, and whistleblowers are literally left blowing in their own wind until they are red in the face. See 'Running the Gauntlet, The Campaign for Credible Whistleblowing Rights" by Thomas Devine and Tarek Maassarini from the Government Accountability Project available on www.whistleblower.org

Based on the analysis and hypothesis proposed so far, including the debate on Insider Trading covered separately, perfect markets will only exist once the human race has achieved a level of enlightenment where each and every person is able to satisfice, rather than satisfy their personal desires, becoming in effect to a large extent self regulating, rather than having to be regulated against by external bodies.

Satisficing is defined as follows:

• To obtain an outcome that is good enough. Satisficing action can be contrasted with maximizing action, which seeks the biggest, or with optimizing action, which seeks the best.
  
  
• In recent decades doubts have arisen about the view that in all rational decision-making the agent seeks the best result. Instead, it is argued, it is often rational to seek to satisfice i.e. to get a good result that is good enough although not necessarily the best.

Source: http://www.utilitarianism.com/satisfice.htm

What is curious is that I used the word satisficing on the basis of what I recall from Econ 101 classes at university in 1984, as it seemed to me then already to be a strange term, thrown in rather haphazardly during lectures, and no doubt an attempt to provide a counter balance to the economist's pre occupation with perfect markets. The term Satisficing was covered in around two minutes and was never again, either during lectures or exams, referred to. The lecturer at the time obviously felt he had invested enough time in the topic for him to claim it was well covered, in itself a satisficing process. My recent search to reacquaint myself with the term pulled up the definition on a website dedicated to Utilititarianism, which is something we had been discussing in the context of Greed and the disappearance of the foundations supporting a search for the Greater Good previously. A nice coincidence in my books, as is the fact that nature in fact provides for satisficing on a much broader scale as can be seen from population distributions and the applicability of George Zipf's Law pertaining to linguistics as well as Pareto's Law.
During the past three months I have come to confirm my belief that a predominant spirit of satisficing in our human population will not be achieved until the new brain is firmly in charge and able to dominate the old reptilian one. On the basis that it took 1,800,000 years for the Homo Sapiens species to realize there must be a better way (with some help from above I would suggest), it will be another hundred thousand years at least (bringing the age of the new brain to 300,000 years) before we will achieve that position. The extra 100,000 years is my own estimate, but may be shortened if the developmental curve is as exponential as the pace of technological advances in the past 100 years. An interesting piece of research would be the hypothesis that a perfect market will not exist until the neo cortex is consistently dominant over the reptilian limbic system. An amusing blog which attempts to present this from a lighter side can be found on http://tinyurl.com/lb4v5m which discusses the possibility that erotic pictures flashing up on trading screens could either increase or decrease risk taking and provide a temporary fix directly to the older parts of the brain, somewhat akin to inserting an electrode or two in the brain. My proposals in later parts of this essay will attempt to find a more long term and permanent fix to the challenge.

Even more interesting would be to forecast in what time span it would be possible if the money spent on the stimulus packages to date was invested in training the neo cortex of the new generations to shorten the time needed to reach this point and to tend the foundations and pillars of our society, which are in my opinion under threat. In that context, Fawad in Oman referred me to a very good discussion on the subject of neuroscience and its application to economics and business, which raises the subject of Neuroeconomics as a separate subject. The blog can be found on the Harvard Business Review blog, link to http://blogs.harvardbusiness.org/hbr/how-to-fix-executive-pay/2009/07/whom-to-pay-is-more-important-than-how-much-or-how.html

Let's have a look at how compounding issues over the space of around 200 years have brought us to where we are now. I originally put 100 years, touching on certain key matters that happened on a timeline during since 1907, but clearly a lot more things happened that had influence on where we are now beyond that artificial barrier.

Before my original start in 1907, when there was a major financial collapse in the USA which was prevented from spreading by one individual, J Pierpont Morgan, I want to touch upon the Industrial Revolution, as suggested by Odette in one of her emails. At various points in this essay I have been referring to Polymaths, especially in relation to the US Founding Fathers and their preoccupation with the many aspects of life and humanity that need to be considered when intervening in systems and processes, to find any effective and least obtrusive option.

Based on that discussion I agreed that the drive to specialize and move away from a polymathic approach to solving problems was indeed started during the Industrial Revolution when the concept of specialization was introduced to create greater efficiencies in production, leading to mass production lines and mass consumerism in the 21st century.

I think the specialization equally happened when the body of knowledge of thinkers expanded and started to be separately classified. Robert Hooke and his colleagues in the 17th century would be quite happy to experiment with rudimentary thermometers on the one hand and prepare a presentation for the Royal Society in London involving a dead dog and a trial to revive it by attaching a smith's bellows to its lungs. Scientists of the late 19th century were already on the road to segregating themselves into the main areas of mathematics, physics, and chemistry, and this process has proceeded at greatly increased speed to this day due to the increasing complexity of life today.

What we have arrived at today is therefore very much a silo model, where there is sometimes little overlap and exchange between different specializations, which can result in an unawareness of possibly effective solutions to major global crises. This is a major issue as major world problems are analyzed from a unique and blinkered perspective which in fact need a full and measured response with inputs from lots of disciplines. The Law of Unintended Consequences has easy opportunities to work where fixes are proposed with a uniquely legal or financial markets approach, without considering the wider context. The problem is gaining more attention under the term "Regulatory Capture", refer to one such article on http://online.wsj.com/article/SB124580461065744913.html

J Pierpont Morgan managed to stave off the 1907 crisis by buying up enormous amounts of shares in collapsing and struggling companies, and essentially provided a private sector answer to what subsequently became considered as a government preserve. Obviously Pierpont knew what he was doing because his actions were successful. No doubt many will argue that there were extenuating circumstances and so forth, but the fact remains that that was the first and last time a private sector effort was made to rescue the world at large from similar nastiness as we are experiencing now, keeping a fairly rigid separation between government and business.

J P Morgan did not suffer fools gladly

After the first world war the pendulum started to swing the other way, towards greater government intervention, with the founding of socialist or more left of centre parties, all quite successful in winning the vote with a message that there had to be some sort of safety net for the very poor and destitute. This is the start of more government intervention in the area of social services and business, with an opportunity for greater Regulatory Capture.

Another major crash happened in 1929, when my great grandfather from mother's side lost his hard earned fortune, and a chance for big government to really join the fray, based on what appears to have been one of Goldman Sach's first forays in creating and capitalizing on an asset bubble, the humble Investment Trust. Refer to John Kenneth Galbraith and his comments on the role of Goldman Sachs in the 1929 crash in his book "The Great Crash of 1929". Various pieces of legislation of significant importance were passed related to financial regulation, and our children still study the New Deal of FDR to this day. The real first opportunity for government to start "managing the economy" as Ken put it in his letter. An example is the recent announcement that the US government will appoint a Pay Czar, whatever that person is supposed to achieve. It sounds like a new antibiotic to me.

Uncle Chris and Uncle Frits in 1907 before being taken to the cleaners by life and the 1929 crash.

This was followed by the second world war. With a huge number of new babies born shortly after the war end until 1965, all competing for resources in short supply, I assume the shortages of resources had a major impact on the individual and therefore general psyche of the baby boomers. This has been commented on by others. Having been deprived of many of the niceties of life we take for granted, and having to compete for jobs and a future, I think there was a huge feeling that it was everyone's right to aspire to the good things in life, and to make a significant break from the past.

The post war period also saw the growth of the US conglomerate, growing at break neck speed to fill the demand in Europe and other parts of the world where productive capacity had been destroyed, using concepts and capacity from left over from the second world war. These conglomerates later became to Multinational companies and a major participant in the globalization process which accelerated away in the 1990's.

The baby boomers by and large turned into a generation of hippies, kicking away the pillars of society and challenging anything that looked like authority or governance, while being very self indulgent. As my father told me, and as Ken agrees as well, the 1960's was extremely good at destroying the old systems, but very bad at putting anything of substance in its place. When I met one of the student leaders several years ago, who is now 64 years old, he freely admitted that in hindsight this is exactly what they did. And, although somewhat reluctantly he also admitted that they made some huge mistakes for which, he agreed, our generations are now paying the price. The significance of this is that I believe many tried and tested standard and measures of society were thrown out, especially related to ethics and values. Germaine Greer, Benjamin Spock and many others, including recently Robert McNamara, hailed as a visionary during his time at Ford and subsequently as author of the Vietnamese War, all recanted and apologized publicly in later life, for the disasters they created with their visions.

Enter the 1970's, while baby boomers were still enjoying themselves and the future was supposedly going to be better and better, except for the unfortunate intervention of the oil crash in 1973. More government intervention as government knows best, similar to your boss, which is also a huge conglomerate. You start seeing more clearly the connections between big business and mercantilism and government. Lobbying is confirmed as an industry and a profession in its own right.

As per Ken, in the 1980's, Thatcher, herself not a baby boomer, but a very clever lady, decides that those telegraph networks and all other social institutions need to be privatized to get away from inefficiencies under the motto that government has no business being in business. In essence an experiment to see whether the market knows best also applies to social goods, to which the market mechanisms normally do not apply very well. I suggest that big business had a further opportunity to expand on the back of the privatization of key government asset. Consumerism accelerates away.

From this point onwards I think we can summarize the past 20 years or so as more of the same but at a greater amplification.

• A continuing erosion of values and ethics, which was suddenly realized towards the end of the 1990's and resulted in an increasing focus by education institutions on offering courses on those subjects.
  
  
• Increasing size and dominance of companies through globalization creating the "Too Big to Fail Syndrome". The old adage from my banking circles in the 1980's that if you owe the bank US$ 100 and can't pay you have a problem, whereas if you owe the bank US$ 100 million and can't pay then the bank has a problem, has obviously been very well absorbed and applied.
  
  
• Increasing consumerism as consumer demand is seen more and more as a determinant of economic growth and health and a solution to address crises.
  
  
• Increasing availability of information with a reduced capacity of humanity to cope.
  
  
• Resultant increases in specialization and a reduced interaction between different subjects and specialists, blinkered views and one dimensional introductions of laws and regulations with an objective to let the Law of Unintended Consequences run freely.
  
  
• Increased government interventions via regulations, in response to both economic and security crises. This is a controversial comment which I have clarified in Part II of this essay by reference to the Sarbanes Oxley Act introduced in 2002. Although there may have generally been an attitude by governments and regulators, especially the USA, to reduce regulations during the 1990's, Sarbanes Oxley and its requirements filled the gap in my opinion.
  
  
• Reduced enforcement of previously stabilizing regulations under pressure from mercantile pressure groups and parties increasing the sense that a type of form over substance approach to lawmaking and regulations setting has overtaken the previous substance over form paradigm of generations of professionals.
  
  
• Growth in service sectors in part because we need more accountants and lawyers to make sense of the regulations, and to think up ways on how to deal with these. In itself a consumerism cycle driven not by any specific basic need of humans, but growth for its own sake.
  
  
• An increasing abrogation of individual responsibilities to the government due to the increasing complexity of our environments and overload of information.
  
  
• Reduced ability of national governments to deal with crises as business has gone global, especially exacerbated by the phenomenon of Regulatory Capture. http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine/print
  
  
• Increasing proximity and interrelationship between big business, mercantilism and government, undermining our democracies.
  
  
• An increasing reluctance of voters to take part in elections, as many do not feel their vote has any effect, and the status quo will be maintained regardless of the individual vote.

In summary, the reason why this part is called "Wobbly Pillars is better than nothing" is that I have come to the view that what my father told me about the 1960's Flower Power revolution is having a negative and deleterious effect to this date, marketed by the same aged mad purveyors of that pot induced nirvana that spawned Gordon Gekko and his colourful braces and equally colourful, but equally bouncy idea that "Greed is Good".

The unabashed hypocrisy and cynicism that accompanies this on going drive to replace traditional standards and values with government mandates of the worst kind, ignoring the Law of Unintended Consequences, and reinforcing Regulatory Capture, is a blight on the human landscape and will require major, radical and well thought out responses. We haven't seen any of these to date.

The next chapter, before launching into any analysis of what some of these more radical proposals could be, will be dedicated to a review of some of the best performers in corporate governance and anticorruption rankings, why they have become what they are, what impact this has on the environment and what we can learn from them. That part will be called "From Bloody Conquest to Benign Consensus - The unlikely rise of the Vikings to the top of the decency rankings"