Stephen Hicks, Ph.D.

Friday talk in Houston, Texas

I’ll be giving a talk on Friday, March 12 to the Houston Property Rights Association on the topic of “Entrepreneurship, Politics, and Ayn Rand”:

“Why are business success and free markets so unpopular in some quarters? There are lots of reasons. One is that business is seen as immoral or boring or both. For the political left, business is money-grubbing and free markets merely let the strong exploit the weak. Even for many conservatives who reject the leftist account, business is what sober, responsible people do to pay the bills.

“Both sides miss the excitement, the nobility, and the romance of business. Ayn Rand’s vision of the entrepreneur — and of those who operate entrepreneurially within existing businesses — is of potentially heroic value creation. At our best, each person in business and in life is akin to the artist creating what was not there before.

“How does Rand’s vision of life and work fit into the current mainstream view of academia and party-in-power politics? Hollywood movies and humanities professors focus on rapacious CEOs and burned-out cubicle workers. Rand focuses on Howard Roark, Dagny Taggart, and the free market system that has empowered and enriched billions.”

Thanks to Rob Bradley of the Institute for Energy Research for the invitation.

APEE panel on the ethics of the financial crisis

At this year’s APEE conference, I am chairing a session on “Ethics and the Financial Crisis.” The rationale for the session: Many conferences and debates are focusing on the economics and politics of the crisis, but much less attention is being focused on the core ethics issues involved.

Here are the participants and the titles and abstracts of their talks.

Ethics and the Financial Crisis
Chair: Stephen Hicks, Rockford College

Alexei Marcoux, Loyola University Chicago
Title: “The Financial Crisis and the University-Based Business School”
Abstract: The current financial crisis is foremost a failure of public policy. Federally chartered corporations like Fannie Mae and Freddie Mac, legislation like the Community Reinvestment Act, aggressive and short-sighted enforcement of the latter by the United States Department of Justice, and protection of the former by key legislators worked together to create and burst the housing bubble lying at the heart of the current crisis. However, I argue that these public policy failures were exacerbated by some of the worst tendencies of private sector actors, many of whom are products of university-based business school education. It is popular to lament the moral education business students receive. However, it isn’t (only) the moral education business schools provide that set the stage for a stunning economic collapse. Instead, a widespread failure of prudence is to blame. Although human imprudence informs virtually all financial calamity throughout human history (think, for example, of the Tulip Mania), business schools are usually understood to be academies for inculcating prudent business judgment. To the contrary, I will argue that business schools are informed by and teach a form of rationalism that is, in fact, incompatible with prudent business judgment. This is an ethical failing, but it isn’t what most prominent business school critics have in mind when they say business schools should be reformed.

Shawn Klein, Rockford College
Title: “Home, Sweet Home? The Paternalism of Expanding Homeownership”
Abstract: One of the main sources of the recent financial crisis was the government created institutions, such as Fannie Mae, and legislation, such Community Reinvestment Act. Part of the way these contributed to and brought about the crisis was in twisting incentives in order to expand homeownership. This paper will analyze one of the main justifications for these institutions: paternalism. Paternalism is the view that it is justifiable to interfere in the actions of individuals, against their will, for the well-being of those individuals. Most agree that it is appropriate for political authority to be exercised against those who interfere with the liberty of individuals, as in the case of theft or rape. Paternalism, however, seeks to justify the use of political authority to curtail an individual’s liberty in the absence of a harm being done to anyone else if this will make that individual better off. The two main questions this paper will address: (1) are these homeownership expanding institutions and legislation paternalistic? And (2) if they are paternalistic, and if paternalism itself is not justified, does this undermine the moral authority of these institutions and legislation?

Jeff Scott, Cognilytics
Title: “Kleptosclerosis: Banking Crises and Corruption”
Abstract: The U.S. mortgage market once again features prominently in the latest financial crisis. From Right to Left, blame is directed at the unintended consequences of welfare policies in housing. From Left to Right, blame is directed toward crony capitalists. Both accusations hold a grain of truth but both are fundamentally mistaken since they don’t identify the hierarchy of causation. Public policies geared toward fueling the housing market for the marginal class of borrowers intensified the boom. That in turn, focused the debate on forms of constituency service (CRA) to traditionally Democratic voters. Alternately, politically-connected bankers benefited mightily during both the boom and the bailout, claiming events were beyond their control, and have prompted Milken-esque searches for retrospective criminality and financial chicanery among the most elite institutions.
However, the cause that made all of these other contributing causes possible is the system of banking itself, of consumer deposits made available for lending, which holds a fraction of consumer deposits in reserve against potential future losses. Leveraged deposits are the essential element of the boom, the crack cocaine of the financial industry. The central bank effectively lowers the perceived risk of lending and investment strategies by protecting deposits and by artificially reducing the cost and variability of funding. By maintaining an expectation of plentiful, indiscriminate and unvarying funding, combined with political favoritism, the central banking system induced an investment monoculture. The dominant portfolio strategy consisted of a one-way bet on the continued rise of housing prices. The subsequent rush to the exits was a reminder of how layers of moral hazard can explode. Financial gatekeeper functions eroded at every possible level, from borrowers and their representatives all the way to the chairmen of the world’s largest banks. The reaction to the bust has intensified all of the wrong trends: more indiscriminate liquidity, more policies to drive up house prices, more political control over mortgage contracts, more risk assets held by the central bank, more danger to the currency, more regulatory forbearance for the zombie institutions, more executive discretion over the flow of capital. Instead of wringing the failure out of the system and punishing financial mismanagement and accelerating bankruptcy and reorganization, U.S. policies pursue the opposite and will entrench “Captain Renault” corruption in the banking system. As long as gatekeepers continue to look the other way, in unison, and benefit collectively from willful negligence, the financial markets will be increasingly managed with regard to constituency service. I call this economic condition “kleptosclerosis,” the redirection of financial capital to the corrupt.

Will Thomas, Director of Programs, The Atlas Society
Title: “Greed, Reason, and Risky Business”
Abstract: Is greed is to blame for bad and risky behavior, and for the 2008 credit crisis in particular? A distinction needs to be drawn between rational greed and irrational greed. Greed, in its basic sense is the desire for more self-centered benefit. Plainly, this can be morally right: a hunger for life, for living well, for happiness, and for the means to these ends. What is thought of as morally wrong is short-sightedness, a grasping moral solipsism, or a miser’s quest for riches detached from non-monetary ends. A rational approach is the opposite of short-sightedness, social indifference, or blind obsession. Means and risks must be rationally assessed. It is here that many capitalists failed.

The conference will be held from April 11-13, 2010 at Caesars Palace, Las Vegas, Nevada. (Aside from the stimulating intellectual discussions, wonder if there’s anything else to do there.)

Talks at Loyola University Chicago

I will be giving a pair of talks next week at Loyola University Chicago. Both talks will be on business ethics, focusing on the ethics of entrepreneurship.

Thanks to Professor Alexei Marcoux for the invitation.

My approach to the topic will be based on my essay “What Business Ethics Can Learn from Entrepreneurship” [pdf], published in the
Journal of Private Enterprise, 24(2), Spring 2009, 49-57. The essay is also available online at the Social Science Research Network.

Defending Shylock

A formal publication of my “Defending Shylock: Productive Work in Financial Markets” is forthcoming this spring. For now, here is a draft version [pdf] of the sixteen-page essay.

From the Introduction:

“Ambivalent attitudes about financial markets are as old as financial markets themselves. Plato, in The Republic (555e), condemns moneylenders. Jesus threw the money lenders out of the temple, on the grounds that they were defiling a holy place. Roman emperor Augustus, according to Suetonius’ racy biography, was always especially displeased if he discovered any of his knights engaged in interest rate arbitrage (Suetonius, p. 76). Shakespeare, in Hamlet, has Polonius counsel his son ‘neither a lender nor a borrower be,’ and in The Merchant of Venice presents us with the image of the lender as a cunning Shylock hoping to extract his pound of flesh.
“We are, in the twenty-first century, heir to all these views.
“At same time we are committed to financial markets. … ”

From the Conclusion:

“… Judged by these criteria, financial markets are highly virtuous institutions. Obviously this is not to say that everyone who works in financial markets is a moral hero or that mistakes and abuses never happen. But it is to say that injustices are aberrations in the system and that the system is designed to help us be that best we can be. Financial markets do create value, and they do so by encouraging in us the core of moral excellence. We cannot ask more of any institution.”

Comments or corrections very welcome before the formal publication.

Spring 2010 CEE guest speakers

The Center for Ethics and Entrepreneurship has announced its four guest speakers for this semester:

Roberto Salinas Leon, Ph.D., on business, education, and philosophy in the US and Mexico.

William Kline, Ph.D., on David Hume’s ethics.

Jeffrey Orduno, J.D., on property rights and the law.

Douglas Rasmussen, Ph.D., on Aristotle and contemporary ethics.

Above is a jpeg version of the flyer. For the pdf, click here. CEE’s announcement is here. For more information, email Chris at CEE [at] CEE [dot] edu, or stay tuned for posts updating times and places.

Kaizen 10 — The Ray Stata interview

The Center for Ethics and Entrepreneurship has published the tenth issue of Kaizen [pdf], featuring my interview with Ray Stata. The interview’s theme is Entrepreneurship and Technology Leadership.

Ray Stata is Chairman of Analog Devices, Inc., based in Norwood, Massachusetts. Working out of his basement, Mr. Stata co-founded Analog Devices in the 1960s. As of 2009, ADI serves over 60,000 customers, has 9,000 employees and a market capitalization of over $6 billion. I met with Mr. Stata in Norwood, and in the interview we explored his thoughts on bootstrapping a start-up, leadership in innovative companies, and the challenges and opportunities of globalization. Make sure you don’t miss the Nova Devices story — what drama.

The issue also features Rockford College’s recent High School Career Day and congratulates five student prize winners: Hannah Mueller, Jennifer LaSarre, Jake Maliszewski, Lisa Voss, and Kelly King.

More Kaizen interviews with leading entrepreneurs are at my site here or at CEE’s site here.

Character and entrepreneurship

Business education is often good at teaching useful business theories and skills but less often good at teaching ethics. Ethics is often seen as irrelevant or as an obstacle, so business ethics is either not included in the core business curriculum or offered as an elective ornament.

Claim: Ethics is organically central to business success, and should be so built into business education. Two quotations from giants of American business in support.

First, from Georges Doriot, one of America’s trailblazing venture capitalists, as quoted in Jeffrey Young’s Forbes Greatest Technology Stories:

“Doriot spends most of his time talking to people who bring him prospective investments. He says he has considered no less than 5,000 of them since 1946. He is considered by friends and critics alike as a brilliant judge of character. But he has to be, he explains. ‘When someone comes in with an idea that’s never been tried, the only way you can judge is by the kind of man you’re dealing with’” (p. 101).

Second, from financier J. P. Morgan, who was once asked whether money was always loaned out based on one’s assets. Morgan replied, “No, sir, the first thing is character.” And, Morgan continued, if someone he couldn’t trust asked for funding, he wouldn’t make the loan even if he had “all the bonds in Christendom” (quoted in Kaizen, Issue 6 [pdf], featuring my interview with venture capitalist Kevin O’Connor).

For both Doriot and Morgan, character is fundamental. So what is good character? How does one acquire it, develop it, and make it second nature? How does one recognize it in others? How does one build institutions that support, nurture, and reward excellent character? That is a core part of business ethics.

And to make a plug for business and ethics here at Rockford College, the Center for Ethics and Entrepreneurship’s web log has a series of recent posts on patents and innovation, low-cost eye care in India, whether new jobs are most created in new or small businesses, and the psychic benefits of non-profit work.

Economic controls [Section 17 of Nietzsche and the Nazis]

[This is Section 17 of Nietzsche and the Nazis.]

17. Economic controls

Through education and censorship, the Nazis attempted to socialize the German mind. Through public health measures and eugenics, they attempted to socialize the German body. A natural extension of both policies was to socialize German economic production.

As would be expected by the socialist part of National Socialism, the guiding principle of Nazi economics was that all property belongs to the people, the Volk, and was to be used only for the good of the people. Just as one’s body is no longer one’s private possession but rather belongs to the whole community, economic property was no longer anyone’s private possession but to be used by State permission and only for the good of the people.

Upon coming to power, the Nazi government nationalized Jewish property and in 1934 passed a law allowing the expropriation of property owned by communists.

Another early policy given high priority by the Nazi government was the organizing of all German businesses into cartels. The argument was that—in contrast to the disorderliness and egoism of free market capitalism—centralization and state control would increase efficiency and a sense of German unity. In July of 1933, membership in a cartel became compulsory for businesses, and by early 1934 the cartel structure was re-organized and placed firmly under the direction of the German government.

By 1937, small businesses with capital under $40,000 were dissolved by the State; labor unions had been dissolved, as were the rights to strike and collective bargaining. Unemployment was dealt with by public works programs of road-building and so on.

All property and labor power was now either owned by the State or, if still owned by private parties, subject to almost-total control. Businesses were told by the State what to produce and in what quantities. Prices and wages were set by the State.

And if anyone complained, a commonly used Nazi slogan put them on the defensive: “The common interest before self interest.”[36] The argument was quite clear: You are not a private individual seeking profit or higher wages in a capitalist economy. You and your property belong in trust to the German people, and you have a duty to serve the public interest, even if it involves a personal sacrifice.

There is an important sub-point worth dwelling upon, for there is a lively debate about just how committed to socialism the Nazis were. After all, they did not outright nationalize all businesses as pure socialism would require; rather they allowed several important businesses to remain in private hands.

A 1935 official statement put the National Socialist policy this way: “The power economy will not be run by the state, but by (private) entrepreneurs acting under their own free and unrestricted responsibility. … The state limits itself to the function of control, which is, of course, all-inclusive. It further reserves the right of intervention … in order to enforce the supremacy of considerations of public interest.”[37]

The issue about how socialist the Nazis were is, in part, a judgment call about long-term principles and short-term pragmatism.

Here is a related example: Clearly the Nazis were strongly committed to racism. But we could point out that they formed alliances with the Italians and the Japanese, neither of whom are Aryans racially. Yet obviously it would be a mistake to infer from these alliances that the Nazis were not really racist. They were racist, but as a matter of short-term strategy and political compromise they were willing to form alliances with those whom they would otherwise despise. Since the Italians and Japanese were powers, it made strategic sense to overlook the racial issue in the short run.[38]

The same holds for the economic socialism: allowing some major businesses to remain officially in private hands made pragmatic economic sense in the short run. The Nazis knew they needed productive businesses to fuel the economy and their developing war machine, so it would have been foolish to interfere too much with smoothly-running enterprises. Additionally, the Nazis knew they could count on the German nationalism of many business owners to go along with what the Nazi government asked of them. And if push came to shove, the Nazis could and did pass precise regulations to direct production as they saw fit.[39]

So while the Nazi government imposed many regulations upon German businesses, the Nazis counted on and received much voluntary commitment and enthusiasm. Most business owners, managers, and workers believed in the cause and devoted their economic energies to it. They saw the personal sacrifices demanded of them as their duty, and they obediently and willingly bore the sacrifices for the good of the cause.

As a result, from 1932 to 1936 Germany underwent an economic boom, lifting itself out of the stagnation of the 1920s and early 1930s. Unemployment fell from six million to one million, national production rose 102% and national income doubled.[40]

By 1936, the same year the Germans hosted the Olympic Games in Berlin, the German economy was again a powerhouse. A national vote was held in March to gauge popular support for Hitler’s regime. “Adolf Hitler” was the only name on the ballot, and voters had a choice to vote for Hitler or not. As dubious as the vote was, the numbers do tell us something: 98.6% of the voting population voted, and of those 98.7% voted for Hitler. That means that over 44 million adult Germans expressed approval and only about half a million did not.

References

[36] “Gemeinnutz geht vor Eigennutz!” (quoted in Meinecke 1950, p. 51); cf. the 1920 Nazi Program.

[37] Quoted in Pipes 1999, p. 221.

[38] Hitler’s pragmatism in foreign policy: “In political life there is no such thing as principles of foreign policy. The programmatic principles of my party are its doctrine on the racial problem and its fight against pacifism and internationalism. But foreign policy is merely a means to an end. In questions of foreign policy I shall never admit that I am tied by anything” (quoted in Heiden, p. xx).

[39] “Buried under mountains of red tape, directed by the State as to what they could produce, how much, and at what price, burdened by increasing taxation and milked by steep and never ending ‘special contributions’ to the party, the businessmen, who had welcomed Hitler’s regime so enthusiastically because they expected it to destroy organized labor and allow an entrepreneur to practice untrammeled free enterprise, became greatly disillusioned. One of them was Fritz Thyssen, one of the earliest and biggest contributors to the party. Fleeing Germany at the outbreak of the war, he recognized that the ‘Nazi regime has ruined German industry.’ And to all he met abroad he proclaimed, ‘What a fool [Dummkopf] I was!’” (Shirer 1962, p. 261).

[40] Shirer 1962, p. 258-259.

[Bibliography]

[This post can also be downloaded as a PDF at the Nietzsche and the Nazis page.]