Extracurricular Reading

From August 2011 Harper’s Index:

• Portion of employers who say they conduct criminal-background checks on potential employees: ¾
• Chance that an American adult has a criminal record: 1 in 4
• Percentage of applicants offered undergraduate admission to Harvard this year: 6.2
• Percentage of applicants accepted for employment on McDonanld’s National Hiring day in April: 6.2

From the July/August edition of Resurgence comes a review of Chandran Nair’s Consumptionomics: Asia’s Role in Reshaping Capitalism and Saving the Planet. by Chandran Nair by Ziauddin Sardar.

Rampant consumerism is the great curse of our time. The driving force is “free market Fundamentalism.” Nair thinks China and India will be forces of change, largely for two reasons:

1. The US model if unsustainable. Corn, which is heavily subsidized, and where farmers pay nothing for the carbon emissions they generate, is an example of a model which assumes Nature has limitless capacity. That model only works when a small proportion of the world’s population is using it. India and China will have to change it or face the end of a habitable planet. (For some reason, I don’t find that reassuring.)
2. Given the failure of “trickle down” market economy, Asian leaders will have to look elsewhere for solutions to meet the demands of the vast majority of poor people who must be lifted out of poverty.

I’m not sure I agree this enough to drive Asia away from a propensity to link success to individual property ownership towards community values and spiritual fulfillment. Of course, if Nair is wrong, we could all be feeling the heat. See also review by Hugh Carnegy in FT.com.

The same issue of Resurgence carried a reprint of E. F. Schumacher’s Buddhist Economics, first published in 1968. Buddhist economics he writes “sees the essence of civilization not in a multiplication of wants but in the purification of human character.” In contrast to Galbraith, who in The Affluent Society, argued we should pay the unemployed so they can sustain themselves with a reasonable standard of living, Schumacher says it is more important to ensure every one has an opportunity to perform creative activity. “It is not wealth that stands in the way of liberation but the attachment to wealth; not the enjoyment of pleasurable things but the craving for them.”

Economists assume that someone who consumes more is better off that someone who consumes less; they have a higher standard of living. But consumption is only a means to wellbeing, the real aim should be to obtain maximum wellbeing with the minimum of consumption. The effort needed to obtain an optimal patter of consumption of likely to be much smaller that the effort needed to sustain a drive for maximum consumption.

The modern economist might take statistics showing an increase in the number of ton/miles per head of the population carried by a country’s transport system as proof of economic progress, while to the Buddhist economist the same statistics would indicate a highly undesirable deterioration in the pattern of consumption…

Just as a modern European economist would not consider it a great economic achievement if all European art treasures were sold to America at attractive prices, so the Buddhist economist would insist that a population basing its economic life on non-renewable fuels is living parasitically on capital instead of income.

May issue of Contemporary Sociology, Cultivating Global Citizens: Population in the Rise of China by Susan Greenbalgh, 2010. I found it interesting to note her observation that China’s one-child policy shifted China’s focus from the quantity of people to the quality of people. This step was aimed at helping China modernize but it also yields increasingly independent and self-governing citizens. She also raises concerns about gender imbalance and the appropriateness of science dictating social policy but it was the growing independence and self-governance that struck me as most interesting.

Spring 2011 edition of The Journal of Portfolio Management, The Clash of the Cultures by John C. Bogle. Bogle is concerned that speculation is winning out over investment in our financial markets and he frames that in the tradition of C.P. Snow as “the ascendance of the culture of science – of instant measurement and quantification – over the culture of the humanities – of steady reason and rationality.” For Bogle, investing is not a science but involves emotional as well as rational behavior.

Even as it becomes clear that a strategy of staying the course is far more productive than market timing, our financial institutions encourage clients to engage in frequent and rapid movement of their investments. Annual turnover of marketable shares was about 15% in 1951. In 2008 it reached 280%.

Providing fresh capital to business, capital formation was once the principle economic mission of Wall Street. While today secondary markets trade $40 trillion a year, total IPOs have average about $35 billion annually over the last decade. Trading in derivatives has soared, $33 trillion in S&P 500 linked futures in 2010 alone and $580 trillion in credit default swaps.

Bogle blames the decline of the ownership society. We went from 92% of stocks being held by individuals to 30%. As he always does, Bogle also blames mutual fund managers for charging high fees, emphasizing short-term performance and ignoring the tax liabilities of their clients. Hedge funds come in for special criticism with their high management fees of 2% of assets annual plus 20% of profits.

However, the rise in speculation also reflects a change in national culture. Whereas trusted professions used to focus on service to the community, they are now focused on maximizing profits. A major force that aided the metamorphosis of the “mutual” fund industry was the change from private to public ownership. ETF is another area of concern, having the “advantage” of being able to be priced and sold throughout the day, as compared to mutual funds “only” once a day. During the five years ending June 2010, the ETFs in which investors invested earned an average 15% but the average ETF investor earned -13% due to constant trading.

Bogle goes on to enumerate many problems in the fund industry reaching a crescendo with

It is surely one of the great paradoxes of the day that the largest financial rewards in our nation are received by an investment community that subtracts value from its clients, with far smaller rewards received by a business community that adds value to society.

The highest earning 0.01% receives 10% of the income – three to four times the share that prevailed from 1945 to 1980 and bright young people would rather go into financial engineering than real engineering.

How do we restore the balance? Bogle offers up several possibilities:

• Higher taxes on capital gains
• Transaction taxes
• Disallowing tax deduction for short-term losses
• Sterner limits on leverage
• Transparency for derivative trading
• Stronger rules to minimize insider trading, conflicts of interest and Ponzi schemes. “We’ve had too much crime and not enough punishment in our financial sector.”
• Let the market clear at prices set by well-informed buyers, not as artificially proper up by the Federal Reserve.
• We need a federal standard of fiduciary duty calling for long-term focus, due diligence in security selection, participation in corporate affairs, reasonable costs and the elimination of conflicts of interest.
• Educate investors to understand not only compounding long-term returns but the tyranny of compounding costs.

July/August Harvard Business Review, Building a Collaborative Enterprise. Paul Adler, Charles Hechscher and Laurence Prusak argue a new form of enterprise is emerging – “one that is simultaneously innovative and efficient, agile and scalable. It is a way of working that focuses on knowledge production.” Key is marrying a sense of purpose to a robust operating structure, an ethic of contribution and an infrastructure that values and rewards collaboration.

Pay systems are not the primary drivers of motivation. Yes, if pay doesn’t reflect contribution over the long period, people will become dissatisfied. The real driver is what Tracy Kidder (The Soul of a New Machine) labeled the “pinball” theory of management: “If you win, you get to play again—to take on a new challenge, to move to a new level.” Reputation becomes the basis for selecting people for new and interesting projects.

A century ago a few companies struggled to build organizations reliable enough to take advantage of the emerging mass consumer economy. Those that succeeded became household names: General Motors, DuPont, Standard Oil. Today reliability is no longer a key competitive advantage, and we are at a new turning point. The organizations that will become the household names of this century will be renowned for sustained, large-scale, efficient innovation. The key to that capability is neither company loyalty nor free-agent autonomy but, rather, a strong collaborative community.

In the same issue, Yochai Benkler’s article, The Unselfish Gene argues our conception that people are interested only in advancing their own material self-interests is mostly wrong. Research has even found neural and, possibly, genetic evidence of a human predisposition to cooperate. “Instead of using controls or carrots and sticks to motivate people, companies should use systems that rely on engagement and a sense of common purpose.” Positive levers include:

• Encouraging communication
• Ensuring authentic framing
• Fostering empathy and solidarity
• Guaranteeing fairness and morality
• Using rewards and punishments that appeal to intrinsic motivations, not material rewards
• Relying on reputation and reciprocity
• Ensuring flexibility.

In the same issue, Why Fair Bosses Fall Behind by Batia M. Wiesenfeld, Naomi B. Rothman, Sara L. Wheeler-Smith and Adam D. Galinsky. Science shows that the most effective leaders are generally “those who give employees a voice, treat them with dignity and consistency, and base decisions on accurate and complete information.” However, while fail managers earn respect, managers seen as powerful often get the promotions. Power and toughness often wins over fairness. “Managers see respect and power as two mutually exclusive avenues to influence, and many choose the latter.” The authors indicate that choice poses big risks for organizations and cite examples where choosing the “tough” CEO turned out to be disastrous.

Managers whose style is based on fairness can still gain power if:

• They cultivate a reputation for ethics and morality
• Their organizational culture is highly cooperative
• The leadership position is relatively uncontentious and they can draw on mentoring and collaborative skills.