THE ETHICAL CAPITALIST - PART 4

Part 1, Part 2, Part 3

Capitalism is not a fat man in a top hat. Before this post, I wrote three posts on The Ethical Capitalist without defining capitalism. This isn’t the flaw that you might think it is.  Working without a definition has forced readers to place their own view on what capitalism is and what capitalism does. In reading this post, I ask that you are mindful on what you believed capitalism was in reading the first three parts.

Many of the images conjured by the word capitalism are actually symbols of capitalism’s corrupted government employed cousin; Crony Capitalism. Crony Capitalism is a quasi-capitalist economy in which businesses require government relationships for success. This system is the natural result of government interference since the government (as mentioned in previous posts) has a vested interest in keeping itself relevant to powerful corporate forces, and only a marginal incentive to protect the weaker voting public.

Consider the recent debate regarding government probing into private secure messaging applications like Snapchat and iMessage (see the article by Slate here). The public, and the media, is outraged by this egregious potential breach of privacy. This reaction is compounded by the fact that the Eric Snowden NSA events are still fresh in our collective memories. In this situation, government interests conflict with the aligned interests of the public and corporate entities, and the public is correct to be wary of a government ruling on the matter.

The government is self-interested before it is interested in public welfare, so consider how it would act when corporate and government interests are aligned and conflicted with public interests. Why do we distrust the government in the case of secure messaging, but trust regulators to work in the interest of the public in other situations?

Crony Capitalism is simply the result of government and corporate interests being preserved by maintaining and strengthening their relationships.

Crony Capitalism leads to every economic problem that is discussed in the news today. And why?

Because:

1. It promotes corporate campaign donations to strengthen ties between government and corporations
• This creates a barrier to entry for politicians who rely on significant donations to run a successful campaign
2. It promotes corporate lobby groups that make sure that corporate interests are met
• Lobby groups with exclusive public interests are an underfunded compromise
3. It creates quasi-public entities with obvious and unavoidable conflicts of interest
• See Halliburton and private prisons
4. It raises barriers to entry for potentially disruptive competitors that are unable to meet regulatory standards that are already met by corporate incumbents
• This reduces choice in the market as oligopolies and monopolies are protected
5. It raises the tax burden on the public to support increased government oversight
• These taxes go to preserving government interests first, not public interests, and result in actions such as those exposed by Eric Snowden
6. It reduces the transparency of government and corporate decision making processes
• Public consent in this situation is a public relations game
7. It forces the public to take on private risks while keeping private profits private
• As seen in regulations such as “Too Big to Fail” and all intellectual property regulations
8. It exports local economic problems to other parts of the world
• This can be seen in various issues from minimum wage to waste disposal

To anyone that does not see how these issues arise in Crony Capitalism, but are not a result of capitalism, I would happily elaborate. But, I’ll leave it for now and move on with a broader definition.

So what is Capitalism?

Capitalism is an economic system in which the means of production are privately owned.

It should be immediately obvious that Crony Capitalism effectively violates this definition since means of production are effectively government owned through their reliance on government protectionism, the offsetting of risk, past relationships, direct financing, favorable borrowing rates and subsidies.

There are those who think that my definition is incomplete and say that it requires some extra points. These extra points usually have to do with profit, the free market and consumerism or something along those lines. But these extra points are unnecessary and restrict the definition to the useless straw-man argument that is presented today. The free market is a possible result of a capitalist system, and consumerism is something else entirely (as seen in previous posts).  But most people seem to have trouble separating profit from the definition of capitalism.

Profit is not a necessary condition for a capitalist agent. Wikipedia, Linux and OpenOffice were not created to generate profit and had different motivations entirely. Google has been criticized for projects such as Google Earth and Streetview specifically because monetization was not the motivation behind them. An increasing number of startups and internal corporate projects are created with a need in mind before the idea for monetization is in place. All of these projects exist because of private ownership, and not in spite of it.

The idea that profit is a universal and primary motivator in capitalism is a myth that is just starting to be debunked. I’m not saying that profit is not a motivator, nor am I saying that profit is not important in a capitalist system. What I’m saying is that profit has a role to play, but motivation is a much trickier and complex thing to pin down. Profit is a simplistic and archaic way to measure that motivation. For more information on the topic of motivation and profit read "Drive: The Surprising Truth About What Motivates Us" by Daniel H. Pink, or for a synopsis watch this video.

To add to the misconceptions in this topic is the left-wing/right-wing divide where capitalists sit at the right and socialists sit at the left. The spectrum of possibilities is, of course, far more complex than a simple left-right divide, but the damage done by the image is greater than an oversimplification. The image implies, among other things, that capitalism and socialism are diametrically opposed, but this is not necessarily the case.

Libertarian Socialism is an economic system in which means of production are owned by the people who operate those means. This system simultaneously accomplishes private ownership and social ownership and therefore does not violate the definition of capitalism or socialism. I don’t want to advocate for the merits of such a system, I just want to point out that capitalist systems exist that do not fall on the spectrum of ideas to which we have become accustomed.

After writing Part 3 of this series, my wife sent me an article by British comedian Colm O'Regan (found here). O’Regan writes a light-hearted take on his research of what capitalism is, and finds (as I have stated), that most people are more likely to conjure an image of a fat man in a top hat than have an actual idea of what capitalism means. I’ll finish this post with O'Regan's powerful conclusion: 

"capitalism might be a good idea, if we tried it."

Thanks for reading!

IP MADNESS

Many people know of my anti-intellectual property stance. Most, if not all, of those people find my view on the subject too extreme, and I can understand that. But even if we are on completely opposite sides, I think most people will agree that intellectual property today is broken. Problems in the system range from taxpayers taking on the risks of private companies to insufficient distribution of lifesaving medicine. But on the lighter side of the stupidity in the world of IP we have Apple which was granted 28 patents on Tuesday (see here). Two of these patents have got some serious attention – the flexible phone and smart glasses technology, but I’ll only talk about the former here.

The flexible phone comes as no surprise as the #bendgate scandal related to the iPhone 6 Plus is still fresh in our minds. This patent describes a mobile device that is meant to bend under pressure while protecting sensitive components. If you have heard of patent trolls, and you think that there is a problem with a system that allows them then I think you'll see that there are problems with the implications of allowing this patent.

Flexible batteries and flexible screens are not a new thing. The screen is the largest fragile part of a smartphone, so if you want a flexible phone you will need a flexible screen. Current flexible screens are made of an active-matrix organic light-emitting diode (AMOLED). AMOLED technology is already a popular technology in many phones since Samsung is a world leader in manufacturing AMOLED displays in many applications while LG uses a similar POLED technology in some of its phones. Most OLED-based technologies can be made about as flexible as high quality copier paper.

The battery is the next largest component in a smartphone, and a flexible variant has also been around for a while. Lithium Polymer (LiPo) batteries can be made to be almost as flexible as play dough and are also becoming the most common type of battery used in smartphones today. The primary reason for LiPo technology to date was not for flexibility, but because LiPo technology was lighter and smaller than previous technology and would have the ability to shape the battery into any shape space available as an added bonus.

The rest of the components, such as the camera, GPU and sensors, have to be made sufficiently small or out of other flexible materials, all of which exist today. These components are already fairly small and have mostly flexible connectors. So what is there left to do? Well, you still have to come up with a way to fit all this stuff together in such a way that the phone is maximally flexible and rigid in all the right places. Admittedly, Apple does excel in putting things together in a tidy way so they should get credit where credit is due. But the patent will only serve to stifle the innovation of potential competitors.

Samsung announced the first “real” flexible display phone here with a prototype in 2010. Though it was extremely flexible, it required a housing for other components that were unable to bend. Still, it shows that Samsung was concerned with the flexibility of their phones about 4 years ago.

The LG G Flex was marketed as a flexible phone over a year ago now, but it didn’t have the flexibility that the Apple patent intends. Still, the G Flex could have been a great starting point for flexible smartphones and an example for other manufacturers to follow and improve on.

Another potential competitor was the Kickstarter project Arubixs. The Arubixs campaign was started in September 2014 and was supposed to be for the development of a “Flexible, Shatterproof, Water Resistant and Wearable Smartphone”. There were, and still are, groups of skeptics that believe that Arubixs is a hoax and that a startup does not have the resources to meet its lofty goals. But, as I’ve already mentioned, the Arubixs would simply be a method of arranging already existing technology, not a build-from-scratch solution. So who knows how far the Arubixs team was down the road? From where I stand, they seem to be as far as Apple.

So why should you care?

Because it's harmful to the public and the most obvious way is that it harms the consumer by significantly increasing the cost of the product. A 2013 study by WilmerHale found that approximately 30% of the cost of a smartphone is used to pay for patent royalties and litigation, which is about the same as the cost of the components. Part of the reason that the cost is so high is due to something called “Royalty Stacking” where overlapping IP claims demand redundant royalties.

These kinds of patents also serve to stifle innovation, and prevent the public from having competitive products. For example, imagine that you are on the Arubixs team and you just heard about the Apple flexible phone patent - how do you react? You might say that there is nothing to worry about since there is significant evidence to show that you were working on something before the Apple patent was approved. But one look at Apple’s Balance Sheet, which has a pile of cash that is sitting there, might make you think that Apple is just waiting to pay for lawyers to prove that you stepped on their toes. Apple has a history of taking these kinds of things very personally so if you have a great way to make a flexible smartphone, Apple's patent might make you think twice about making it a reality.

The IP is ultimately as strong as the legal team that defends it. So if you are a small, cash starved, startup trying to make the case that you came up with an Apple idea before the patent came out you might be in some trouble making your case. Instead of encouraging innovation from competitors, potential competitors would now be deterred from even trying.

Let’s not forget that patent processing and enforcement are a public matter – that is, the taxpayers pay for IP. Whenever a trial for patent infringement occurs, or a patent is filed, it’s the government that is picking up the bill. In that way, patents are a way to maintain a government enforced monopoly at the expense of taxpayers. The danger of this kind of a system is that the risks associated with bringing that to market are transferred from the private company to the taxpayer, but the profits are privatized.

Patents are also notoriously difficult for the public to read or understand. The current system of IP is reminiscent of Christian scripture circa 600 AD when it was only written in Latin. Common people, who had no hope of understanding scripture (many who couldn’t even read), had to trust authorities as to what scripture stated and meant. Battles over scriptural interpretation were done so far beyond the reach of common people that they had no meaningful input into those interpretations. However the interpretations would have serious repercussions on the lives of common people since it was the basis of all their laws and many traditions.

The same is done today by giants like Apple that write patents far beyond the understanding of the public. To see an example of how the public misunderstands IP and how Apple exploits that through PR, see the article by the Verge here. Those patents are then enforced using the taxpayer’s resources while legal expenses are financed by the consumer. This is all done to prevent competition, which would actually benefit the public by coming up with new, and potentially better, ideas.

Now I know Apple (and others but especially Apple) makes products that people love, so I don't think that a complete Apple boycott is reasonable, or even called for. All I ask, is that the next time you fall in love with an iSomething, take a moment to think about how you are being exploited by the IP that powers it.

6 FACTS ABOUT MORTGAGES

This post is inspired by the Buzzfeed.com style article of "Top (#) of things that (blank)." For the non-enumerated version of this post, look here.

Here are 6 facts about mortgage amortization:

1. Longer amortization can make you money: Mortgages are often the cheapest form of capital available to the general public (lower than secured loans or lines of credit). By paying less every month for a mortgage, a borrower can reinvest the savings in an RRSP and get more back in taxes than interest savings from a shorter amortization.
2. Longer amortization does not mean you must be in debt longer: Most mortgages have favorable prepayment options that allow you to pay back a mortgage considerably faster than the length of the amortization. Good prepayment options can shorten your amortization to shorter than 5 years!
3. Longer amortization means more optionality: Many borrowers don’t have stable, predictable income. These borrowers can benefit from longer amortization if they have a bad year and need to pay less every month. In good years, they can use prepayments to accelerate their mortgage payments.
4. Longer amortization increases the risk on the side of the lender, not the borrower: In corporate lending, a lender will shorten amortization if the borrower is seen as risky. Low-risk borrowers can get loans with no amortization at all. Longer amortization is lower risk to the borrower since the required debt service is lower and the borrower has more excess cash.
5. The shorter amortization policy is a form of collusion between lenders: Longer amortization is riskier for the lender, so lenders will compete with each other by extending amortization. Forcing shorter amortization mandates a collusion between lenders since it prevents that kind of competition.
6. High Net-Worth individuals are able to get long amortization products that others can’t: Longer amortizations have not been eliminated since High Net Worth individuals are able to get longer amortizations by finding lenders that are not covered by specific policies, working with “friendly” institutions that vie for their business or borrowing through a legal loophole like setting up a corporation for the specific purpose of borrowing funds.

HOW NOT TO HELP

It is widely accepted that a modern democracy cares more about the public perception of policy than its effectiveness. If you don’t believe that statement then a simple rewind of your Google search to the rhetoric surrounding issues like Obamacare and raising the debt-ceiling should be evidence enough. There are other policies, many outside of the US, that seem to go completely unnoticed by the public, or are even touted as a great thing for the public, when they are actually serving to undermine the very public that endorses them.

An example of this ignorant acceptance of a policy (that I have always been critical of) is the elimination of longer amortization mortgages to the Canadian public. The policy is one thing, but the positive press regarding the policy is outrageous. Back in 2011, the Globe and Mail had an article called “Good riddance to 35-year mortgages” (found here) that was precisely this kind of positive press. The article makes the case that the 35 year mortgage was simply too long and that “even 25 years seems too long to spend paying off such huge debt.” According to a BMO poll (also from the article) most Canadians agreed with BMO stating that “(56 per cent) think a shorter amortization period is a good thing, with those aged 35 to 44 the most inclined to agree (77 per cent).” I struggle to find another contemporary example of such a gross misunderstanding of the costs and benefits of a policy.

The benefit of this policy is skewed heavily in favor of powerful lenders and away from the borrowing public. Since the beginning of the low-interest rate environment, rate competition between lenders was so marginal that it was making very little optical difference to their customers (borrowers). In order to compete, the only move a lender had was to extend their amortization thereby lowering the cash flow required from the borrower. Extending the amortization put the lender in a risky position since the borrower would have more of the lender’s money for longer. Lenders were forced into this kind of risk competition instead of a more typical price competition. In order to prevent competition, lenders could set a price and an amortization that they could all live with and all make money at an agreed upon risk level.

The problem for the lenders is that this solution is a type of collusion, and collusion between competitors is illegal as stated by Canada’s Competition Act (which exists in other forms in other countries as well). So how do you get around a policy that is preventing you from colluding with your competitors? The answer is simple – just enact another policy that mandates the collusion that you are looking for. The policy in question would force lenders to take their 30, 35 and 40 year products off the shelves and, with only shorter amortization available, lenders would no longer have to compete in terms of amortization.

The next step was to sell this change as a benefit to the borrower. Before the removal of these products, the borrower was “forced” to be in debt for 30, 35 or 40 years, or so it was commonly claimed. A 35 year amortization does NOT mean that the borrower will be in debt for 35 years, even the Globe and Mail article acknowledges the benefit of prepayment options. Many mortgages allow you to pay 20% of the principle in any given year, which means that you could pay the whole thing back within 5 years, even with a 35 year amortization! Using prepayments can convert your long amortization mortgage into a short amortization mortgage. The article uses a simple calculation to show how much more interest a borrower would pay with a longer amortization than a shorter one. This is a completely bogus example since it does not take into account the time value of money or the prepayment option in the longer amortization which would serve to lower your interest payments.

Getting rid of longer amortization mortgages just means that you lose the option to pay less each month, it does not mean that you MUST take longer to pay it back. A longer amortization means lower monthly payments, which can be a life saver for those with a small business or variable income (commission-based income or other performance-based income).

It is also important to note that High Net-Worth (HNW) individuals are still able to get those long amortizations by finding lenders that are not covered by the policy, working with “friendly” institutions that vie for their business or borrowing through a legal loophole like setting up a corporation for a specific purpose. The general non-HNW public, in turn, are given fewer options in how to purchase a home.

A common rebuttal to my position is the observation that people who are entering the real estate market are often bullied into buying a more expensive home because they can afford a longer amortization. This is true, but shorter amortization does not fix this problem. People are still bullied into the same situations with shorter amortizations since the lenders' metrics are based on cash flow, and those metrics have not changed. The only difference is that the lenders are now getting their money back more quickly, which is an extra burden on the borrower and lower risk for the lender.

The correct solution is to educate the borrower of the risks that exist with debt and mortgage products and present them with all available options. Instead we accept that the general public is unable to be educated in this manner and enact a policy to protect lenders by mandating their collusion. If that’s your idea of help, then please stop helping.

YOUR IDEA SUCKS

The iPod was my idea. I came up with it significantly before the launch of the first iPod, and I used to talk about it often when I was critical of portable CD player technology. Same thing with the iPhone, I came up with that in 2001 right after the launch of the first iPod beating Apple's launch by 6 years. I can actually claim the same thing about the whole Apple hit lineup. My streak isn’t even exclusive to Apple, I came up with the idea for tabbed browsing, spam filters, the smart home, mobile-based ride sharing and many others that are currently the foundation of successful tech startups today.

The paragraph above is not some analogy, it is absolutely true and there are basically three types of reactions to it:

1. The skeptical reaction – “if it was your idea, then why aren’t you the CEO of Apple, or Uber, or Nest etc.?”
2. The believer’s reaction – “Wow! You need to get a lawyer and sue those guys, you could get millions! Or billions!”
3. The correct reaction – “Who cares?”

“Who cares” is the correct reaction because the ideas were worthless. Because I am outspoken about the tech sector, and I am a shareholder in a mobile startup (www.imhangry.ca), I get told great ideas for a tech company all the time. There is only one catch, of course, and that is that I have to execute the idea while giving the originator of the idea a small equity stake, or the idea might even be given for free (quite generously). If you are one of those people who think that this is an equitable arrangement, this message is for you.

You probably think that this kind of an arrangement sounds like a reasonable partnership between an idea person and an execution person. I have news for you – we are all idea people. We live in a society with a collective confirmation bias. We often trivialize success and misunderstand failure. The narrative for success becomes a search for a hero and we often attribute it to an idea or a visionary. Failure, on the other hand, infects everything around it as the root cause is passed like a hot potato between ideas to environment to staffing decisions etc. (Note that this method of external attribution, often through media coverage, runs contrary to the proverb "success has many fathers, failure is an orphan").

The truth of the matter is that success is much more complex than either side of the narrative would have us believe. The success or failure of an idea is dependent on an ever growing list of factors of varying importance, and the idea itself falls pretty close to the bottom of that list. Wired.com recently had an article (found here) about how many dot-com failures were actually great ideas. Of course they were, but to say they were great ideas is a loaded statement.

Take an example that everyone is familiar with – Facebook. The so-called “idea” of Facebook was thought of before Facebook, and a million times over at that. Myspace is probably the most cited example as being a Facebook predecessor. You might be tempted to point out that Facebook and Myspace were not really the same thing and that Facebook had a cleaner interface, that its growth strategy was smarter etc. and therefore the idea was technically different. But the only reason that we are able to get so granular about Facebook vs. Myspace is because of our intimate knowledge of each product. If we took an example from the wired.com article, say WebVan vs. Amazon Fresh and Instacart, and looked at it with the same knowledge we have of Facebook and Myspace then we would immediately see how the comparison of the two is unfair.  

From the outside, two businesses might seem very similar, but from the perspective of an operator they are likely to be wildly different. Take Uber and Hailo, for example. From an end-user perspective the two ride-sharing companies seem virtually identical. After a little bit of research, however, you will come across the fact that the two have a very different approach in how they enter new markets, deal with regulatory conditions, market the company, deal with their employees and establish partnerships. From an internal view, the disparity between the two would grow even larger. The failure of one of these companies should not taint the ride sharing concept as a bad idea, nor should the success of the companies win the label of “great idea”. The idea is not what makes the company great, what makes it great are all the things that surround and support the idea.

The idea, by itself, is worthless, and there are at least two major facts that show this. First is that virtually all startups pivot because the original concept is simply not working as expected, or a better opportunity arises. This just shows that the original idea is either wrong or not specific enough to create success and the company’s success is more dependent on its flexibility than its original concept.

Second, ideas are given away for free today. If you want to try your hand at a startup but you aren’t sure what you want to do, you can go to various places online, or in your community, to find a startup idea that is up your alley. Ideaswatch.com is one such place online, but you can also check out forums in your area of interest, or network with local entrepreneurs. Chances are that if you’ve thought of it, someone has already tried some version of it, and can impart some relevant knowledge.

The moral here is that if you have a great idea, and you’ve been thinking about how to do it, then by all means, do it! On the other hand, if you simply don’t have the time, knowledge or resources to pull it off and you need to get someone else to do it for you, then I’m sorry, your idea sucks.

THE ETHICAL CAPITALIST - PART 3

Part 1, Part 2

There are few things better than watching a video by a jolly bearded fat man during the holiday season. I am, of course, referring to Slavoj Zizek and the video that was posted in the comments in Part 1 (found here). This post will be a response to that video, and a bit of an elaboration on that response toward the end.

I want to be clear, I like Zizek. I think he presents some good points and he does it in an entertaining way. He is completely unfazed by his lisp and accent as he powers through tongue twisters of Anglophone philosophical prose and social commentary. This confidence, combined with clever book titles and turns of phrase, is what I think has earned him the popularity of much of the western world. My high-level criticism of Zizek, however, is that he will generally start off with a good idea but, using a semantic (and albeit poetic) distraction, he will reach conclusions based on an appeal to intuition and emotion rather than a careful reasoning of the facts.

In the video, Zizek groups a variety of economic issues and paints them all with his “Cultural Capitalism” brush. It is a common technique to compare your opponent’s position to something ludicrous or unethical in order to make your position seem like the only viable option. You may have experienced an extreme but common example of this when, in a discussion, someone compares your opinion to that of a famous dictator (see Godwin’s Law), or calls you by a label with which you feel no association. Zizek employs this technique, though subtly, when he plays fast and loose with concepts like capitalism, consumerism and evil. Capitalism and consumerism are NOT the same thing, but many people have come to believe that one implies the other. Consumerism is a cultural phenomenon that has the potential to arise in any number of economic settings. Consumerism is to capitalism what the keg party is to social drinking.

Zizek implies that the current state of “Cultural Capitalism”, which he describes as the pairing of consumerism and anti-consumerism, is likely to increase into the future, and presents Tom’s shoes as a ridiculous example of this model run amok. As mentioned in Part 2, Tom’s shoes is not an ethical agent at this point, it is what I called proto-ethical. It is an experiment that is filling a demand in the current market. As the market changes, becomes more informed and more educated, so too will the business model. These cause-marketed companies, like Tom’s Shoes, are a mere stepping stone, not a final destination as Zizek would portray.

Ironically, the accurate and eloquent presentation of issues in the current system, as done by Zizek and his peers, will serve as a catalyst to educate the public. As mentioned in parts 1 and 2, education is key to the public making informed purchasing decisions, and ultimately driving demand toward the ethical. Zizek, in a way, describes this evolution in the video when he talks about Soros doing things the “old way”, then Starbucks, then Tom’s shoes. Each step has an element of market demand-driven iterative improvements and experiments.

There has been some question as to whether the description of the economy using evolutionary theory is valid. The short answer is yes, and it has nothing to do with them both being of “natural causes”. The analogy is not new, and ultimately originates with Thomas Malthus, who identified a problem with the increase in the food supply versus the speed at which population was increasing. Malthus found that the result from the growth disparity would be a mass extinction due to a scarcity of resources. Malthus’ idea was foundation for Charles Darwin’s Origin of Species and Adam Smith’s Wealth of Nations, of course Darwin and Smith replaced extinction with competition.

Subsequent theories and improvements on Darwin and Smith have been applicable in both fields. From game theory to fractal geometry, applications designed for one system ended up in the other and the fields of economic theory and evolutionary theory became irrevocably linked. The power of the evolutionary analogy comes through a second time in Zizek’s video when you consider the fact that the theory only allows for incremental improvements which result in inefficient and seemingly illogical intermediate forms (like the “semantic over-investment” in Starbucks and Tom’s).

The point here is that capitalist agents respond to their environment, which in their case is consumer demand. As I stated in part 2, the ultimate responsibility rests with the consumer since the consumer ultimately shapes the environment. When I watch Zizek’s video I’m reminded of one of those conversations I’ve had, after hours of talking, I realize that I actually agreed with my opponent the whole time. Zizek’s points do not disagree with the Ethical Capitalist model, he rightly points out that capitalism has caused capitalist agents to change. What he fails to realize, or mention, is that these agents will continue to change as shaped by demand. Every point that Zizek has made represents an evolutionary stepping stone, not an end-point, that makes up the environment that will produce the ethical agents that we are waiting for.

The plan is for the next post to cover choice in the market, then predictions for the future and finally follow-up with some conclusions. If there is a really good point made in a comment or message then there might be an extra post or so to cover that.

Thanks for reading!

THE ETHICAL CAPITALIST - PART 2

In Part 1, I discussed how we are entering the dawn of the Ethical Capitalist. Most of part 1 was dedicated to describing the current environment, this time I will go a little deeper and address some of the rebuttals I got in the form of comments and discussions.

At the core of most rebuttals is this notion that, in general, the incentive to act unethically will always exist and that this incentive is core to capitalism. A slight variation on this idea is that acting unethically is not core to capitalism, but the capitalist system is indifferent to ethics, and as a result is indifferent to unethical actions. Another corollary is that if agents are only acting based on the weighting of incentives and deterrents, then it is not a true moral action, just one that might seem to be moral incidentally.

For the past few years I have found the cynicism surrounding the incentive to act unethically very interesting. I’m not entirely sure where this belief comes from. Maybe it comes from the personal experience of many people who overcame an urge to do something unethical, or maybe it comes from roots of the Abrahamic religions that claims about 50% of the world’s population and has doctrine that states that we are all born with an original sin (I know that the three Abrahamic faiths have a different take on original sin, but there is an underlying theme that remains constant – we are all flawed since our genesis).

Proponents of this view, regardless of religious alignment, suggest that responsible oversight and regulation is the best answer to this structural flaw. But the major issue with this view is that it falls prey to an infinite regress, namely “who watches the watchers?” Why work under the assumption that those who run regulatory bodies are somehow separate from the incentives of private industry?

The belief that incentives are skewed toward the unethical is a myth based on a misunderstanding of the origins of ethics. Consider the moth that flies into a flame. The moth is driven by an instinctive and prehistoric navigation system that it inherited from its ancestors. The fact that the moth, and many of his colleagues, die from this course of action does not destroy the moth population because the action is offset by the birth rate of the population.

Now let’s move up the evolutionary chain a bit. Piranhas are known for their ability to consume large animals by overwhelming them with sheer numbers. A common question regarding the piranha is, “why don’t they eat each other?” The short answer is, they do.

Like the moth, the piranha population has a certain allowed amount of self-destructive behavior, but unlike the moth, this kind of behavior is far rarer in the piranha than in the moth. The reason for this is that there is a huge penalty for the piranha population if it were unable to work as a team. The cooperation of the piranha community allows it to consume animals that would otherwise resist their attack, or eat them as individuals in a counterattack.

This favoritism for cooperation in a feeding frenzy over their tendency to attack one another is an example of proto-ethical behavior. In this stage of the evolutionary chain, the behavior can hardly be considered ethical by human standards, but we do see an incentive toward a sense of community over the individual.

As humans, we try to separate ourselves from this model, but in reality our morals are just as driven by deterrents and incentives as the piranha and moth, the only difference is our ability to plan further into the future. Those who would say that Natural Selection is free from ethical concerns would be correct, but our moral compass is still a product of Natural Selection as is any other part of our cognitive makeup. Consequently, our separation of ethical decisions from any other decisions is an artificial distinction for our convenience, and the study of ethics is simply the study of repercussions with a longer time horizon.

By the same reasoning, capitalism is free from ethical concerns, it is merely driven by the forces of supply and demand. Therefore, if an ethical corporation is to succeed, it must drive demand independent of its ethical status. The Ethical Capitalist is in some trouble at this point if the cost of ethical actions keeps the capitalist agent from being competitive with its indifferent, or unethical, competitors.

There are three reasons why this line of thinking is flawed. First, consumers are willing to pay a premium for a perceived ethical product. The success of companies like Bullfrog power and Tom’s shoes, as well as a slew of other cause-marketed companies, is built on this premium. The reason that these companies are able to function profitably is because capitalism ultimately reflects the demands of the consumers, and the consumers are, for the most part, ethical agents. Investors in the space are also willing to lower their required rates of return for investments in these types of companies because of their ethical alignment.

Second, ethical actions do not need to cost more than unethical or neutral actions. Google’s motto of “don’t be evil” is a statement that costs almost nothing, but sets the corporate culture for the people that work there. The company has found ways to profit off of ethical actions such as providing internet to low-income markets and giving much of their product out for free. Yes, these are done with long-term profit in mind, but that’s precisely the point! It would be dishonest to say that an action is ethical only if it results in a cost rather than a gain.

Third, the statement does not consider the cost of doing an unethical action. The tech giant Uber has currently been in the news due to many questionable tactics that it has used to gain ride sharing supremacy. The use of perceived unethical tactics has cost Uber a considerable loss of business and given some market share to its competitors such as Lyft, Hailo and Sidecar. If Uber is able to come out of this tailspin, it will be due to a change in public perception about its ethics as a corporation.

I can already hear the cynics' cry something like “public perception is the key, not ethics.” And the cynics would be right, but this is the same thing as saying that survival is key, not cooperation. This is why, in part 1, I stated the importance of decentralized media, not just social media, to draw attention to what is actually ethical and what is just perceived as such. A corporation engaged in greenwashing or a charismatic C-level executive is no longer enough to fool the public into seeing PR as true ethical action. Decentralized media is becoming more sophisticated and decentralized with time and will only continue to do so in the future.

As with all organisms, there exists deviant behavior that threatens to destroy a population, and the same can be said for capitalist agents. The examples of Bullfrog Power, Google and Tom’s shoes are primitive proto-ethical agents that are acting more like a piranha then a human being. But as consumers become more aware, businesses will either have to evolve to the new, more advanced, consumer or be replaced by a competitor.

Mistakes will happen and, in turn, consumers will punish these mistakes with the loss of patronage. The end-game is that capitalist agents will reflect the ideals of the consumers as a whole, so the drive to change and improve ultimately exists at the consumer level. If the consumers are ethically minded, then the corporations must adapt to reflect these ideals to survive in an ever-changing marketplace and become ethical capitalists.

Thanks for reading!