Would 'Trustworthiness' matter between Self-Interest and Control?
Dr. Senthil Kumar Ph.D.
Knowledge for Freedom, Enlightenment, and Positive Action | School of Fish Strategy Consulting |
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." - Adam Smith, The Wealth of Nations.
Above is the famous quote from Adam Smith in support of the argument "how self-interest in the free market" creates the necessary demand and supply condition resulting in productive economic transactions and the wealth in a society. Those who quote this statement of Adam Smith in support of the free market idealism, often fail to recognize the moral intentions of individuals and moral hazards in trusting fellow men emphasized by Adam Smith - which also underlie this demand and supply dynamics and creation of wealth. Actually, it is 'enlightened self-interest' that Adam Smith reinforced in his work. In the absence of morality and enlightenment, free-market can quickly turn into a 'Hobbesian jungle' (The condition of man .. is a condition of war of everyone against everyone). At the outset, let us remind ourselves, within a few decades of the Adam Smith's above publication, the colonialism and unchecked free trade caused one of the biggest famines of all times - Irish Famine - just in the Adam Smith's neighborhood disproving his theory of invisible hand's efficiency - In 1840s close to million Irish farmers died of malnutrition lacking even potatoes and corn to eat.
Before Adam Smith's invisible hand 'self-interest' creating wealth, there are other powerful systemic, social forces that hamper the efficient functioning of demand and supply mechanisms. While self-interests may naturally entail a gentle and mutually cordial transactions and relationships in a small village or town, however as the size of the market or the volume of transactions and population in a system increase, there are many invisible and frictional social forces that arise due to moral hazards which can hamper the efficient functioning of markets and can cause distrust, and derail the self-interest dynamics into greed, poverty, apathy, ennui, and gluttony, and thus generating social disturbances and class warfare.
As Adam Smith concluded in one of the essays in his 'Theory of Moral Sentiments', "This disposition to admire, and almost to worship, the rich and the powerful, though necessary both to establish and to maintain the distinction of ranks and the order of society, but to despise or at least to neglect persons of poor and mean condition, is at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages."
With the rise of moral corruption and greedy tendencies to further aggrandize the wealth and power often resulted in steep inequality, economic turbulence, and political upheavals weakening the national interests. It is quite obvious and inevitable that moralist views have naturally given credence to the collectivist and utilitarian argument that power and wealth if unchecked would result in deprivation of basic rights challenging the very existence and decent life. The collectivist argument can sway to the right with nationalism as the core political ideology or can swing to the left in favor and support of the poor working population. Either way, political bandwagons can be pushed to the extreme destabilizing the socio-economic-political structure in any society.
Distrust and moral hazards are further exacerbated by various social and systemic frictions. One of the important frictional forces engendered within a large society or organization is ' information asymmetry '. The other major force of friction is 'bias' created by the diversity of interests, social groups, and fashion, fads, and short-term interests. Then, of course, the acts of god that derail the demand and supply equilibrium quite often moving the balance of forces to a new state. Globalization is another new phenomenon that further complicates the problems of information asymmetry and bias.
The objective here is not to take an ideological or political stand for the discourse, rather suggest how to reduce the information asymmetry, and bias in the market system that skew the advantages, transactions, contracts, wages, and returns in favor of some. All of us are aware of the popular extant recommendations offered in the form of leveling the playing field, anti-trust monopoly restrictions, minimum wages, labor laws and standards, taxes, social security, and public welfare schemes to offset the problems created by inequality, national debt, and aggrandizement.
Notwithstanding the corrections rendered by democracy driven choices and alternative political solutions, the problems of information asymmetry and bias are still major systemic challenges affecting the efficacy of both market and government/ organizational methods. Despite democratic revolutions, radical transformation and populist governments making all sorts of corrective measures to increase the market efficiency and curb the excesses in the past 250 years after Adam Smith, the information asymmetry and social biases are still the underlying causes that increase the conflicts among various sections of society.
"From American revolution to Lincoln's civil war, Theodore Roosevelt's Anti-trust campaigns, and FDR's Industry recovery act, & New deal, to the recent Dodd-Frank Wall Street Reform act, all would qualify as some form of such corrections."
The governments have been equally inefficient hampered by corruption, bureaucratic delays, lack of responsiveness, and lack of consensus and so on. Since governments often sway from left to right, and right to left without any consistent policies and strategies the corrective measures have a weaker impact because they are pursued haphazardly. Rising population, globalization, resource crisis, and border-less markets and firms are further exacerbating the crisis more and more and are weakening national economies. This is one of the reasons why the European Union is facing deep fissures within and among the member states.
Although the right to information acts, transparency regulations and the free access to information available through the internet have reduced the bureaucratic distance between people and the governing institutions, the level of distrust between governing bodies and the citizens has been steadily increasing. Now, the public trust over democratic institutions - be they are national or local - legislative bodies, judicial bodies, law enforcement organizations, financial institutions, and business systems is at an all-time low.
No doubt, the internet and communication technologies have reduced the distance and time barriers, and enhanced the efficiency of organizations. However, the trustworthiness and transparency of governing bodies are being marred by incompetence, lack of integrity, and decline in public goods which we get to see from the media on a routine basis. Enhancing trustworthiness and transparency at every level within the organizations and society, and creating more public goods will be the primary challenge for leaders, and these are the only real solutions to reduce information asymmetry and bias causing social frictions, and to building peaceful societies.
Trustworthiness and transparency can be augmented in many ways. Autonomy to operational units, increased professional and local controls, right-sizing of public /civic entities, increased 'inclusiveness' and 'representativeness' of diverse stakeholders in governance systems, employees and stakeholder participation in corporate boards, incentives and rewards in the form of structured ratios and slabs rather than arbitrary market selection, stringent controls on corruption, and keeping the account books transparent. Modern technologies such as mobile communication, GPS, and the internet can play an effective role in matching the demand and supply of critical information in regard to costs, benefits, and risk associated with major decisions to significant stakeholders.
Dear Professor, Thanks for a thought provoking article. Do you think the individual biases will have minimal impact on collectivism of small right or large left to undermine democratic process? With warm regards
Knowledge for Freedom, Enlightenment, and Positive Action | School of Fish Strategy Consulting |
8 年Hi Solyom, Thanks for your comments and interest in this post. More than a moral/ethical issue, the self-interest or control are quite often articulated as ideological perspectives. Any system irrespective of ideology behind it, has to have individuals at the power center trustworthy and self-restraint. Otherwise, no system will last forever. Trustworthy individuals and systems will substitute for controls and lessen the damages caused by self-interest.
Owner at KS Business Development | [email protected]
8 年If you could get an honest answer (you can hooking up to a MRI machine) and ask a large group of strangers attending say a sports or music event about where their allegiances lie... You would find that most have a hierarchy of allegiance on which is laid a framework of morality... For example some would say God - Family - State or others Military Team, Family, God.... etc. Humans can connect strongly around 150 individuals. Everybody else is a stranger... Strangers may or may not be a threat... Some humans can be relabeled as sub-humans... not worthy of our code of morality... And therefore fair game when it comes to pillaging, ..... etc. Since people are not uniformly like minded, similar in culture, having identical beliefs, etc. So we wind up with US and THEM. If our need is great then it's better US than THEM... All relationships outside of our immediate tribe (the trusted 150 - if you have that many) relies on mutual benefits... in other words trade... trust is earned by cultivating a predictable behavior that is positive. The effort that goes into earning this trust yields benefits that are greater in value than the cost of maintaining trust. So it is something that happens because we all benefit. Morality is a tribal concept and not a universal concept. Even the most evil individual (on someone's morality scale) will have trusted followers with their own moral code that justifies whatever actions they take to protect their tribal interests. Rule of law is mechanism that we use to negotiate a bridge between tribal morality A and B and C and so on... It persists if the benefits far exceed the cost and collapses when the benefits evaporate...
Professor at Anna University
8 年Well written