Category: Business and Society

William Easterly, author of The White Man’s Burden has an interesting piece in the Wall Street Journal today where he responds to Bill Gates’ call for “creative capitalism” Gates argues that the way capitalism is practiced it doesn’t help the poor and argues for increased philanthropy on the part of businesses.

Easterly points out that :

Profit-motivated capitalism, on the other hand, has done wonders for poor workers. Self-interested capitalist factory owners buy machines that increase production, and thus profits. Capitalists search for technological breakthroughs that make it possible to get more output for the same amount of input. Working with more machinery and better technology, workers produce more output per hour. In a competitive labor market, the demand for these more productive workers increases, driving up their wages. The steady increase in wages for unskilled labor lifts the workers out of poverty.

The number of poor people who can’t afford food for their children is a lot smaller than it used to be — thanks to capitalism. Capitalism didn’t create malnutrition, it reduced it. The globalization of capitalism from 1950 to the present has increased annual average income in the world to $7,000 from $2,000. Contrary to popular legend, poor countries grew at about the same rate as the rich ones. This growth gave us the greatest mass exit from poverty in world history.

The parts of the world that are still poor are suffering from too little capitalism…

Easterly points out that governments and philanthropists just don’t have enough information and knowledge to make the right decisions. This is why they have failed and why markets have worked. It is the age-old problem that Friedrich Hayek called The Fatal Conceit.

Easterly notes:

Moreover, how do philanthropists choose just which product is going to be the growth engine of a country? Much research suggests that “picking winners” through government industrial policy hasn’t worked. Winners are too unpredictable to be discovered by government bureaucrats, much less by outside philanthropists.

There are many people with good intentions who want to help the poor live according to their dignity, but good intentions often don’t mean good policy.

We know what has helped the West create prosperity. It was not foreign aid or philanthropy–it was the key institutions of private property, rule of law and free exchange that created a framework for markets and for entrepreneurs to use their energy and insights to meet the needs and wants of millions. What the developing world needs is less aid and more of the institutions of freedom.

Two weeks ago, French bank Société Générale announced that off-balance sheet speculation by a single “rogue trader” had cost the company 4.9 billion Euros ($7.2 billion). The scandal had enormous repercussions in international markets leading some commentators to decry the rotten nature of global “casino” capitalism and to call for the reversal of financial liberalization. However, the actual circumstances of the case do not justify more government intervention in financial markets but illustrate individual moral failings and poor internal governance on behalf of the bank.

A new report also suggests that a lack of internal controls and weak enforcement of existing rules may be the real source of the problem at one of the oldest banks in France.

On January 24th, Société Générale said that it had discovered a “massive fraud” through “a scheme of elaborate fictitious transactions.” The event caused a great stir not only for the magnitude of the bank’s losses but also because it is partly blamed for the worst European stock market collapse since September 11, 2001.

Jerome Kerviel, who worked as a junior trader in the arbitrage department at Société Générale, was responsible for betting on markets’ future performances. The bank claims that he had made unauthorized and concealed bets of around 50 billion Euros on European markets. According to the New York Times, Mr. Kerviel told prosecutors that his bets would have resulted in a profit of 1.4 billion Euros for the bank if they had been cashed out by the end of December. However, at the start of this year, stock markets experienced a sharp downturn turning the projected profits into losses.

The French bank discovered the bets in mid-January when auditors in the risk management office noticed a series of fictitious trades on its books. Société Générale then conducted a dramatic market sell-off operation in order to neutralize Kerviel’s deals. Traders estimate that the bank unwound contracts in the range of 20 billion to 70 billion Euros from January 21st to 22nd.

Many suspect that selling all these positions into an already volatile European market contributed to the shocking stock market performance in Europe around that time. This in turn, provoked an unexpected and controversial interest rate cut by the Federal Reserve of 0.75 per cent in order to protect the New York Stock Exchange which had been closed on the day when European markets dived. The curious series of events was summed up by a hedge fund manager who told Reuters that: “The real story here is basically, this guy, paid 100,000 Euros a year, sitting in some office at SocGen, forces the Fed to cut interest rates by 75 basis points, which is basically what happened”.

The huge and wide-ranging market repercussions have given ammunition to the critics of financial liberalization. An editorial of the French newspaper Libération sarcastically entitled “Casino” laments that no one controls the huge sums of money moving around in financial markets and demands tighter regulation of financial markets. It also claims that the scandal embarrasses President Sarkozy’s alleged embrace of laissez-faire capitalism. (more…)

Blog author: jballor
Thursday, January 31, 2008

What do you look for when you are searching for a job? A growth industry? A healthy bottom-line? A positive corporate culture? Some combination of the above?

Fortune magazine recently rated the “Top 100 Places to Work.” Not surprisingly, at the top of the list is Google, which not only is dubbed the “millionaire factory” because of its generous stock option packages and a matching top tier share price, but because of the innovation associated with its workplace. Employees are encouraged to spend a good chunk of their time focusing on their own “pet” projects.

But second on the list is a Michigan-based company, Quicken Loans. What makes Quicken a great place to work? “Ethically driven” is what one employee calls the online mortgage lender: “It avoided the subprime crisis by sticking with plain-vanilla loans.” You don’t need to be a “social entrepreneur” in the latest sense of the term to be “ethically driven.”

So what connection is there between the top two companies on Fortune‘s list? Google’s well-known motto is: “Don’t be evil.” You might call that the “silver rule” of business ethics. (The “golden rule” would be a positive statement like, “Do be good.”)

To the extent that Google and Quicken embody a way of doing business that emphasizes both profits and ethics, we can see how in the long run ethical business makes the most economic sense.

Also check out Christianity Today‘s annual feature, “Best Christian Places to Work.”

Two new Acton commentaries this week:

In “Religious Liberty and Anti-Discrimination Laws,” Joseph Kosten looks at recent controversies in Colorado and Missouri involving Roman Catholic institutions.

Without the liberty to decide who represents its views and who disperses its message to the public, a religious institution or organization lays bare its most vulnerable aspect and welcomes destruction from within. Separation of church and state does not mean that religious institutions may not function within a state, nor does it mean that they can not decide who they hire.

Michael Miller and Jay Richards examine the economic proposals of Gov. Mike Huckabee in “The Missing Link: Religion and Economic Freedom.”

Now of course there is no one “Christian” set of policies on the best way to help poor or stimulate an economy. Unlike life issues, these are prudential matters and good Christians can disagree. Yet there seems to be a growing tendency among Christians to allow the left to claim the moral high ground with their big government interventionist plans despite the fact that history has shown this to be not only ineffective but harmful.

Blog author: rnothstine
Thursday, January 24, 2008

Ronald Reagan delivers his radio commentary

When I lived in Egypt one of the Egyptian drivers for diplomats at the American Embassy in Cairo explained how people had to wait five to seven years for a phone. He proudly stated he was on the list, but poked fun at the long wait for service. Of course, he also added that you might be able to speed the process up by a few months with bribes, or as it is more affectionately knows as in Egypt, “baksheesh.”

Ronald Reagan loved to tell jokes about the former Soviet Union, especially about the stark differences between the United States and Soviet economic systems. It was a tactic he often used to take the hard edge off his criticism of the Soviets, while still drawing sharp contrasts between the competing systems. It also deftly showed his solidarity or sympathy with the Russian people.

Often to the horror of some of his top foreign policy advisers, he loved delivering the jokes directly to Mikhail Gorbachev at summit meetings. Gorbachev would politely smile or sometimes counter by adding that the joke was just a caricature of the Soviet system. But Reagan had carefully collected many of the jokes from former citizens of the Soviet Union, diplomatic officials, and some of them were passed to him by the CIA. Many of them were real jokes that had circulated inside the Soviet Union.

Many of Reagan’s jokes were a critique of the insufficiency of the Soviet system.

A Russian man goes to the official agency, puts down his money and is told that he can obtain delivery of his automobile in exactly 10 years. “Morning or afternoon,” the purchaser asks. “Ten years from now, what difference does it make?” replies the clerk. “Well,” says the car-buyer, “the plumber’s coming in the morning.”

Another joke Reagan liked to deliver summed up his thoughts well. Two Russians are walking down the street, and one says, “Comrade, have we reached the highest state of communism?” “Oh, no,” the other replies. “I think things are going to get a lot worse.” (more…)

Blog author: rnothstine
Monday, January 21, 2008

It appears the citizens of an anti-democratic China have stood up to government authorities who are suggesting smoke free restaurants in preparation for this year’s Summer Olympics. The Beijing Disease Control and Prevention Center urged restaurants in the Chinese capital to completely ban smoking on their premises. While the smoking ban is only a suggestion, the article declares not a single restaurant has taken up the suggestion in the city of Beijing.

Even though the United States has fewer smokers by far, maybe we can send them some of our own big government anti-smoking officials to assist them in banning smoking in restaurants and bars. After all, they have been quite successful in our own country of squashing the rights of proprietors to make their own decisions about their business.

It looks like the first mistake of the Chinese government officials was in offering a mere suggestion to city eateries. The government’s tactic clearly lacked language that exudes a self-righteous and a morally superior tone. Language that assumes to know what is best for our own interest, over the interest of businesses owners to choose what is appropriate for their customers. Chinese bureaucrats have much to learn from freedom squelchers in our own country.

The attempt to diminish smoking in Beijing facilities is part of a larger public relations effort to spruce up the Chinese image across the world. Unfortunately, it doesn’t seem to say much for the current state of Western values when the Chinese government feels smoking is the biggest negative image maker in a country marked with notorious human rights abuses.

Whatever your personal opinion about smoking in public, I’ve always felt business owners should be able to make up their own rules about smoking in their facility. Apparently even the authoritarian government in China agrees, because after all, it was only a suggestion.

Yesterday was the fortieth anniversary of Johnny Cash’s live recording of the album At Folsom Prison. On the 1999 re-release, the brief song “Busted” (originally recorded by Cash in 1962) was included.

And while the price of cotton is more like 50 cents per pound now (which is much lower than the cost of inflation over the same period), the song still speaks to the situation of many folks today:

“My bills are all due and the babies need shoes but I’m busted
Cotton is down to a quarter a pound and I’m busted
I’ve got a cow that went dry and a hen that won’t lay
A big stack of bills that get bigger each day
The County will haul my belongings away I’m busted!

I went to my brother to ask for a loan I was busted
I hate to beg like a dog for a bone but I’m busted
My brother said there ain’t a thing I can do
My wife and my kids are all down with the flu
And I was just thinking of calling on you I’m busted!”

Something of note in that tune penned by Detroit native Harlan Howard: when in need, the man turns to his family first (not the government).