Over at The Huffington Post, Professor Ronald Colombo opines that what is at the root of our current financial crisis is "a national crisis of character." He argues that the Great Crash of 1929 was seemingly the result of "the moral laxity of the cabaret and the bedroom . . . extend[ing] to a certain moral laxity within the corporation and the boardroom," and that similarly "today's financial meltdown has been preceded by a certain relaxation of traditional values." His prescription: more "values" education in schools, more ethics training in MBA and JD programs, and more discussion and consideration of moral issues in corporate communications and decision-making.
But I'm not sure that all this soul-searching and soul-cleansing solves the problem of capitalism. Capitalism is predicated on the free flow of capital. Capital flows to where it is expected to earn the greatest return. Businesses that attract capital thrive, those that don't die. So, when the time comes to choose between profit and virtue (and the time will come), the virtuous capitalist that sacrifices profit will be left to starve. By its very nature, capitalism sets up a sort of Lemons Market. Virtuous capitalists will eventually be priced out of the market because they will eventually have to sacrifice profit for virtue and the natural law of capitalism dictates that capital will abandon them the moment they do so.
So, what is the solution? Well, since the problem of capitalism that I've just described is rooted in the efficient flow of capital in pursuit of profit, the solution arguably is to put some brakes on the speed at which capital can "jump ship" and the heights to which profit-seeking can go. Putting limits on the size to which firms can grow and how much compensation the managers of those firms can make might be a start.
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Pretty much true, but can virtuous politicians survive? They are after all the ones who can (claim they can) fix the problem of crooked corporations.
Can virtuous bureaucrats survive? They would have to be the day-to-day enforcers of any regulatory system set in place to control the excesses of capitalism.
How about virtuous reporters and news networks? Some years ago I listened regularly to BBC and heard FACTUAL reporting of newsworthy events. You know; who' what, when, where, how, and occasionally why. It's hard to find any station that gives you a dash of BBC anymore. Too monotonous. Instead we get the circus of 6:00 news. On slow days they pretty much make up news. They liven up a dull news item by interviewing two or three guys who are totally clueless but think there must be some kind of a conspiracy. They toss in 'informed sources' to mask a personal opinion. A drunk who claims an alien sighting is a good source.
And then there are virtuous football and basketball coaches, athletes and referees, (probably not nearly as many as we like to think) virtuous cops and DA's who have to figure out some way to get convictions of very dangerous people in spite of the roadblock thrown down by virtuous Justices, etc.
I think you are on to something with limits on capital jumping ship. I think the practice of day trading seems to suck money out of the system, rather than provide money as the system is designed. Unfortunately, the pay for transaction commissions system benefits further from this practice. I would like to see a time limit similar to 401k rules. Perhaps a limit that does not kick in until some pre-defined abuse level is reached.
On the other hand, if a corporation chooses to pay it's CEO an astronomic sum, it is really none of the regulators business. Some of these CEOs earn their pay. I think shareholders need to do a better job of holding the board responsible for poor decisions.
I also do not think a corporation can become too large as long as it does not become a monopoly. Regulation like this would lead to shenanigans like sister-companies with the same ownership. And potentially products not being brought to market.
I seem to have heard somewhere that some foreign stock markets – Japan for one – really do require that an investor sign on at least for a short cruise or boat ride if not for the duration.
The astronomical pay is probably ok for about a dozen of the corporations in our world, maybe Bill Gates and a very few others. Just like $20 Meg a year is ok for a franchise player here and there. The big bucks are likely to have the opposite effect of that intended. I think there are athletes who would be a whole lot better at their game if they didn't have so much money, and I suspect the same is true of CEOs. Actually corporations in most cases don't 'choose' to up the boss's salary; the boss is instrumental in the choosing. The only realistic vote a shareholders usually has is with his feet.
As to corporate size, let's face it: the whole purpose of forming a corporation is to achieve some sort of monopoly power. The reason every MBA has to have taken ECON 101 somewhere is not so he can work to achieve a place as one of the grains of sand in a pure competition market. When you understand pure competition, you realize that however beneficial it is for society as a whole, it sure as H… isn't where you want to position your firm.
There may well be economies of scale that dictate a very large size for the firm in some industries. They also dictate an intensive interest by the government.
It's a completely false dichotomy to say one has to choose between virtue and profit unless you're thinking in the most rudimentary terms.
It seems the hazards of risk are left out of your capital roadmap. Rational investors account for risk when directing their capital. In an efficient market, the price of an investment incorporates risk. Of two investments promising the same return, the rational investor chooses the investment alternative with the least risk because he wants (1) his money back and (2) a return on his investment. An investment with higher risk has a lower probability of (1) or (2) occuring than an investment with lower risk. Risk is among the drivers of the axiom that a dollar tomorrow is worth less than a dollar today. You not only want your dollar today rather than tomorrow because you may be able to better use it today, but you also might realize that something might prevent me from returning your dollar to your tomorrow. If a lender holds two notes with identical terms owed by two borrowers with equal resources, do you think the value of the note owed by the less virtuous of the two borrowers should be equal to the value of the note owed by the more virtuous borrower? Should your answer change if the lender is the federal government?
Rather than focus on firm size or exec. compensation limits, the regulatory powers that be would do better to first determine exactly what the private, public, and government players actually do with the responsibilities and capital entrusted to them by the investing public. The problem is not capitalist system. I believe the problem lies closer to the abuse of power by those entrusted with the public's capital and the ineffectiveness of regulation as implemented by ANY governmental authority. Take a look at the GSEs referred to as Fannie and Freddie. Hold your nose and peek at Wall Street. Follow the trail of Billion$ from Wall $treet to Wa$hington. Ask where those Billion$ came from, who worked to produce them or who will pick up the tab. Find $omeone in Wa$hington that cares. Let me know if you find someone before the next election.
I love your reasoning, and you'd get my vote were the office to be filled a chairmanship of the philosophy department. In fact, one of the key assumptions behind classical economics is rationality of all buyers and sellers, and another is 'perfect market knowledge', the notion that every buyer and seller of anything in any market knows pretty much instantaneously whether the quality of any one product is better than another, or that the risk involved is higher or lower in any one investment as opposed to another. If that be true how could there ever have been an ENRON or a Bernie Madoff? If I'd had a million to invest a year or two ago, I'd probably have put a decent chunk of it in GM.
You just have to stay vigilant.
Every form of government struggles with corruption.
A monarch can oppress his people for personal gain.
A socialist bureaucracy can end up like Orwell's Animal Farm.
The openness of capitalism is the best defense. Now, we live in a time where the press does a horrible job. That is unfortunate. But if we continue to vote with our wallets that too will likely correct itself.
At the end of the day, I believe we had Enron and Bernie, etc. because people were lazy, reckless, greedy, gambling, or just following the herd as it went off the cliff. Nobody ever seems to complain – at least we do not hear about it – when everyone is making money. It seems people claim to understand the risks and the all the types of investments, but then later can't seem to understand why their retirement funds disappeared. Only when the wheels fall off the wagon under the weight of all the carnage do we get to see the scapegoats. We can't afford to let people hid behind curtains and pull levers and chains anymore. But I do not think we need more government in our financial markets, just for the sake of new government. We need common sense compliance schemes that do not impede the velocity of capital movements, and we need honest, capable, disinterested people to administer them. Having these will facilitate openness and better capitalism – as long as we demand them.
But people ARE reckless, greedy,… herd animals etc. (Don't forget gullible.)
But I do sort of agree with you that we don't need a whole new set of laws. What we do need is to enforce the laws we already have, which was not a very high priority for the last eight years.