Wednesday, February 27, 2008

Business, One Night Stands, and Polygamy

I gave the following presentation at the February 2008 monthly meeting of the Bastiat Society in Charleston, SC.

I did not enter the world of business via the usual paths. My family was not in business. My father was an artist and my mother worked for the state. As an undergraduate, I studied the humanities and sciences. At the risk of sounding pointy-headed, I came to business via my own search for the meaning of life. Little did I suspect that I would find it in earning a living.

My business career started in a philosophy class. A professor gave me subscription cards to reason and the now-defunct Inquiry magazines. Soon, I was voluntarily reading Adam Smith, Murray Rothbard, Milton Friedman, Friedrich Hayek, Ludwig von Mises, Frédéric Bastiat and others in the European liberal tradition, when I should have been studying something else.

Philosophy led me to economics, and economics led me to the belief that free market capitalism is the most productive form of large-scale social organization known. Through the pursuit of self-interest under the rule of law and an evolved moral code, entrepreneurs, business owners and executives create great wealth for themselves and for their societies.

But capitalism is more than just the creation of great wealth. Capitalism is morality in action, the morality of free and responsible individuals. Wealth without morality is theft. Morality without wealth is poverty. Only capitalism offers humans the opportunity to build a social order where they can be moral and they do not have to be poor.

When I announced my intention to go into business to my family and friends, along with some stunned silences, I got two memorable warnings. First a successful technology salesman told me I would never make it. He said, “You are too honest.”

This startled me, but I reasoned if there were that many crooks in business, honesty must be an unexploited marketing advantage. As Mark Twain advised, “When in doubt, tell the truth. It will confound your enemies and astound your friends.”

The second warning came from someone already in the same field. He told me getting clients was no different than picking up girls in bars. Now I was really worried. I was never any good at that. With slightly less confidence but a great deal of optimism, I went into business.

There I discovered the truth. First, honesty is a valuable business skill, not a liability. Honesty builds better marriages, families, friendships and business relationships. Human nature craves honesty and trust, and it quickly punishes those who fail to deliver them. It appears we operate based on an internal rule of, “Trust someone until they give you a reason not to.”

Second, I discovered that building business relationships is not at all like picking up women in bars (lucky me). It is not about lots of short term, unstable, one-sided relationships. It is about lots of long term, stable, mutually satisfying relationships. It is really like a successful marriage. Or, to be more dramatic, it is like successful polygamy.

The keys to success in business are the same as in any relationship: honesty and reliability. How then, did business get such a bad reputation? Why didn’t I know this before entering business and discovering it for myself? Why didn’t the technology salesman know it? Why didn’t the guy who treated his clients like one night stands know it? How could something so important be so misunderstood?

The answer lies in human nature, where the first rule is “survive.” All that we are, both the good and the bad, is there because at some point in the history of our species, it proved useful in the struggle for survival. Violence, lying, cheating, fear of strangers, envy, love, trust, peaceful competition, and cooperation are an ancient set of behavioral tools. We are all stuck with them, whether we want them or not.

However, through our culture and civilization, we have been steadily expanding the social and physical space where peaceful competition and cooperation work better than violence, fraud, and cheating. This doesn’t mean those awful behaviors aren’t there or that we’re not still tempted to use them – witness the warnings I received. Those behaviors just aren’t as effective in the struggle for human survival as peaceful competition, trust, and cooperation.

Consider, for example, the specific behavior of violence. Many people feel the world is becoming more violent. But the psychologist Stephen Pinker of Harvard has demonstrated that the world is undeniably becoming less violent, making violence more conspicuous when it does occur. In a world where lots of people die violently, another violent death is not news. In a world where few people die violently, it is. It grabs our attention and skews our perception.

The same logic applies to the business world. In a world where most commercial transactions conclude honestly, peacefully, and to mutual benefit, those that do not are news, and the bigger the breach of trust, the bigger the news. Think Enron. Think WorldCom. Psychologists call this an anchoring bias. When one event acquires far more significance than it should, it creates the impression that the exception is the rule. To borrow the title one of Bastiat’s essays, “What is Seen and What is Unseen,” we see the business scandal, but we do not see a much larger market that works extremely well.

The danger in anchoring bias – something we are all subject to as humans – is that people will act on the basis of biased perception, not on the basis of facts. The undeniable fact is that for-profit businesses employ, feed, clothe, house, transport, heal and entertain more people than all the charity in the world, and they do these things faster and better. Yet, consider the following news stories which paint an entirely different picture.

In the February, 2008 edition of Scientific American, Michael Shermer began an article on the evolutionary basis of the psychology of corporate environments with a loaded question, “Do All Companies Have to be Evil?”

In the 2006 movie, Superman Returns, Superman’s archenemy Lex Luthor is no longer the mad scientist he was in the old comic books. The director, Bryan Singer, said he wanted Luthor to be more bitter, more angry, and more evil. So he made the character a businessman. Luthor swindles an elderly, terminally ill woman. Then he tries to create his own continent (he must have been a developer). Kevin Spacey, the actor who played the role of Luthor, said he based his character on Enron’s Ken Lay.

According to a 2005 study of network television by the Media Research Center, corporate executives are twenty-one times more likely to commit a kidnapping or murder than mobsters, five times more likely than terrorists, and four times more likely than gang members.

With news and entertainment like that, it is easy to see why the exception becomes the norm in expectations, why headlines anchor the perception that all business is evil. Unless we can change this perception, we run the risk of a social and political war on the system of exchange that makes the modern world possible. Certainly, we all agree that any business guilty of theft, fraud, or violence should be punished. But an indiscriminate attack on all business is nothing less than an attack on civilization itself.

In Europe, the attack has already begun. Stefan Theil, the European economics editor for Newsweek, describes in detail what he calls “Europe’s Philosophy of Failure.” In a 2005 poll, just 36 percent of French citizens said they supported the free-enterprise system. In Germany, support for socialist ideals is running at an all-time-high. The most important French history text describes capitalism as “brutal,” “savage,” “neo-liberal,” and – the most damning word of all – “American.” In Germany, students are told India and China are successful because they have large, state-owned enterprises and have protectionist trade policies. Sub-Saharan Africa is held up as a case-study on what a free-market does to people.

The expansion of peaceful competition, trust, and cooperation under a private property rights system has been long and powerful. But it is not inevitable. What must be done to ensure its continued success?

First and foremost, we should proudly proclaim that a profitable business, honestly run, is one of the great achievements of mankind. The world is getting better and it is free enterprise that is doing it. Each mutually beneficial business transaction increases the overall well-being of the world. It reinforces trust, and it is trust that makes commercial civilization possible. Trust is the essential lubricant for commercial activity. Cheating, lying, stealing, violence and fraud are sand in the system.

On the other hand, cheating, lying, stealing, envy, violence and fraud are tools of the trade for criminals and politicians. We should be very skeptical about relying on politics and public policy to improve the world. As social tools, they are tempting because of their immediacy and power. The truth is that nothing is easier to change than public policy. All it takes is another election. The United States tax code is a depressing example of what happens when we rely on public policy to improve public policy. True reform must come from the culture, from the ground up (individual decision making), not from the top down (political decision making). If top down political reform worked as well as its faithful followers believed, Iraq would be a peaceful democracy today.

There is another danger in relying on public policy to improve the world. It comes from those unscrupulous souls among us who are eager to use the power of government to crush their competition and loot their customers. These businesses are often successful, but they are not market successes. They are political successes. They rely on government-sanctioned violence to collect the profits they cannot earn in the marketplace.

The best way to keep business out of government and government out of business is not to limit the size and influence of business. It is to limit the size and influence of government. A large and powerful government – even one with good intentions – is simply too tempting a prize to lay in front of that part of human nature that would rather steal wealth than earn it. Our Founding Fathers knew this well. That is why they drafted a Constitution: not so much to free humans as to bind the government’s ability to meddle in the affairs of free men.

Third, we in business should watch our language. We should never use phrases like “giving back” to describe the money or time we give away. It implies we took something that wasn’t ours. Phrases like this make us sound like a generous gangster or a Congressman running for re-election, not a valuable member of society.

Fourth, we all should learn enough to defend capitalism ourselves. This doesn’t mean we have to become PhDs. We can take small steps to improve our awareness of the ideas that make freedom work so well. For example, in Charleston, SC, we created the Bastiat Society to educate business people on how their efforts to make a profit also make the world a better place. We named the Society after the great 19th Century French economist and statesman Frédéric Bastiat, who was a master at explaining complex ideas in language anyone could understand – even maids and merchants. Our motto is, “Those who work in freedom should know how freedom works.” In addition to monthly meetings, the Bastiat Society maintains this blog where we try to have something new and thought-provoking every day. I encourage individuals interested in these ideals to consider starting their own discussion group, or consider partnering with the Basitat Society.

The Bastiat Society has worked with Liberty Fund, a private, educational foundation that promotes wide-ranging discussions centered on the topic of a society of free and responsible individuals, directing conferences for business people, addressing issues such as eminent domain, business ethics, and corporate social responsibility.

There are also opportunities for business people to engage in the self-study of economics. The Mises Institute offers an online course in Austrian economics. The Austrian School included Ludwig von Mises and Friedrich Hayek and played an important role in the development of free market theories. Austrian Economics influenced programs at the University of Chicago and the University of Virginia, and influenced Nobel-prize winning economists like Milton Friedman and James Buchanan. Friederich Hayek’s The Road to Serfdom is available as an audio book in most medium-sized public libraries. Many Austrian lectures and videos are available on YouTube. The Foundation for Economic Education a number of educational opportunities, including the periodical The Freeman: Ideas on Liberty.

Fifth, as wealth creators, business people have many opportunities to influence the intellectual and cultural opinion about business for generations to come. When philanthropy is carefully planned, the time and money successful business people donate can sway public opinion far more than the profit they earn. Business people should make sure they are not handing their money to their ideological enemies in the university, in public policy, or in the popular culture. They can avoid this by consulting with the Philanthropy Roundtable before making major gifts. They can use legal documents to enforce their intentions and prevent “mission drift.” They can also set up their own foundations with documents that clearly express donor intent, rather than making an unrestricted contribution to existing foundations or institutions.

None of what I have said should be taken to mean that business makes saints out of sinners. The crooked timber of humanity cannot be straightened out by an economic system. We will always struggle with inappropriate behaviors that are the vestiges of our beginning. However, capitalism is the economic system that is most consistent with our human nature as it really is, not as we wish it could be. Free market capitalism makes heroes out of ordinary men and women, one satisfied customer at a time.

1 comment:

BFU Rector said...

Beautiful. Your points did call to mind a particular Bastiat Quote:

" We cannot but be astonished at the ease with which men resign themselves to ignorance about what is most important for them to know; and we may be certain that they are determined to remain invincibly ignorant if they once come to consider it as axiomatic that there are no absolute principles." - Bastiat