Sunday, December 4, 2011

The Myth of the Banker-Philanthropist

Here's my response to Justin's comments on my last post about how banking can be an ethical career by channeling high-powered capital toward good causes.  According to ethicist Will Crouch, "if you spend your money wisely, you can do much more good by taking a lucrative career such as banking than by pursuing a conventional ‘ethical’ career such as charity work."

It's a wonderful idea, especially in theory, that basically underlies the whole reason I'm in finance in the first place.  In fact, I think ethical banking goes hand in hand with my idea of softening the ideology of self-interest.  But as long as infinite self-interest prevails in finance, I don't think ethical banking is viable.

First, two of my favorite economic fallacies
  1. The partial equilibrium fallacy: This is a common and powerful argument in economics, but which sometimes has destructive consequences.  Crouch states "if you decide not to be a charity worker, someone else will take your place, and so the benefit you provide would have happened anyway."

    Financiers use the same logic to justify amoral actions: "If I don't rip off this investor, someone else will."

    On an individual level, both may be 90% true.  But if everyone uses these arguments, there would be fewer charity workers, and there would be economy-collapsing levels of fraud.  The partial equilibrium argument thus can lead to disastrous social consequences, and I don't consider it a valid justification for doing an action.

    Contrast the economic logic with moral logic:
    "Do unto others as you would have them do to you."
    "Act only according to that maxim whereby you can, at the same time, will that it should become a universal law."
  2. The Darwinian fallacy.  This follows similar logic as above, that financial agents cannot but exercise infinite self-interest, because if they didn't someone else would and they would be outcompeted in the market.

    I agree that there is a coordination problem, but infinite greed is far from inevitable.  Greed itself isn't the problem.  It's greed at all costs - the willingness to destroy others for a dime - that's so pernicious.  If every company acted on Wall Street-level greed, we'd literally be living in Somalia.  Other industries seem able to find a balance.  Google and Apple are subject to the same capitalistic forces as Goldman, but I think Silicon valley represents a far more benign flavor of capitalism than Wall Street.  If Wall Street can even reign it in to Wal-Mart level greed, I think firms and capitalism would find a way to survive.

    Cooperation and empathy are, after all, also products of evolution.

Now onto the meat of the argument.  The reason I like the black hole metaphor is that it highlights the inherent instability of absolute greed coexisting with good inside the same system - within an individual or in a society.

The black hole distorts the morality of everything around it.  When finance makes profits from moral arbitrage, it puts pressure even on people inclined to do honest work.  It directly makes honest work less profitable by cheating away retirement funds, punishing savers, and eliminating jobs.  Our willpower is also finite.  We're less inclined to do honest work in the face of financiers' obnoxiously ill-gotten riches.

Working in finance as it currently exists and donating the proceeds amounts to firebombing civil society and then paying for its reconstruction.  Indebting people, kicking them out of their homes, eradicating their jobs, and then giving them charity doesn't make much sense.

There are also reasons why we hardly see any banker-philanthropists in the industry today.  A completely amoral financial sector disproportionately attracts sociopaths and people with no interest in doing good.  It's hard for anyone with a conscience to work and succeed in such an environment.  Loosening the profit motive is crucial to enabling ethical bankers to enter and stay in the industry.

Doing good also requires a lot of effort.  I think being a humanitarian is a lifelong process of learning and engaging with others, not just writing checks.  Ethical bankers have to think about what causes they care about, how to solve difficult social problems, and which organizations to support.  It's hard to put your heart into doing good and then to go to work ripping people off.  Eventually one precludes the other.

In the end, I come to the same conclusion.  Allowing one industry to completely flout morality destabilizes and sucks away good from the rest of society.  Working in such an industry sucks away good from a person.


Jesse B said...

I like the blog a lot - Hope I can do something similar myself (started one during my PhD but it dissipated when I had kids and had to focus on my JMP).

I think calling for "less greed" or for people to intentionally leave money on the table is going to be hard. As you note, greed is not good. What a capitalist society does is (in some cases) transform greed into the provision of useful goods for consumers rather than let it lead to the acquisition of an army for plunder.

Rather than calling for less greed, I think it is useful to separate profits by their source: value add vs rent seeking. Apple and Google provide value to their customers and along the way make profits. Much of the financial sector generates profits due to rent seeking through regulatory capture and/or social norms which privatize gains and socialize losses. These two sources of profits lead to two different social problems we, as a society, need to address (and you discuss here on your blog):

1. The financial sector. Either we need a way to get private gains/losses (through smaller banks which can fail) or social gains/losses (through highly regulated or state-owned banks). I prefer the former, but will take the latter as a second best option. Either is better than what we have now.

2. Consumerism. I'm afraid you are the exception (or at least in a small minority) who take action against consumerism. A few more dislike it but crave the latest iPad anyway. Most people have more crap than they know what to do with and want more. The problem here is that most companies do provide goods that people want, but they want more and more and more. I have less good ideas of what to do about this one.

Jialan Wang said...

Hi Jesse,

Thanks for your excellent comments!

Here's my reply

And let me know if you want to co-blog sometime!