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February 13, 2012
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Are the interests of individuals different from those of society?

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Fri, 09/25/2009 - 1:50pm
Humbolt
User offline. Last seen 2 years 5 weeks ago. Offline
Joined: 09/10/2009

No - they are obverse sides of the same coin!

As the G-20 Summit convenes, we are barraged with news coverage of government functionaries looking for their 15 minutes of fame while mindless talking heads pander to the insatiable egos of the henchmen for their respective demagogues by asking "thoughtful" questions. One of the recurring themes is the question of compensation for individuals in the financial services industry - globally. Why this is a matter of great import seems to revolve around the presumed importance of the financial industry. Of course, one wonders what the response would be if that same oppression were to be imposed on other groups. Give it time - even the inflated wages of the self-serving rank and file of the UAW are not safe.

No one in their right mind would suggest that the financial sector is unimportant to the world economy. However, it strikes me that taking the step from acknowledging its global importance to allowing the ministers of countries like, e.g., Turkey and Indonesia, to pontificate on the appropriateness of bonuses paid by private companies in the US (and elsewhere) and issue "recommendations" for compensation restrictions in order to align the interests of individual bankers with those of society is a leap that defies anything that could be characterized as logic and, more importantly, is totally and completely unnecessary. The interests of individual bankers and society (however broadly defined) are aligned - not merely because of the tautology that society is a collection of its individuals.

The fundamental principles of economics suggest that so long as there is a gain from commerce, we will trade with one another. That some parties have a comparative advantage over others in one endeavor implies that the first should supply the output of that endeavor to the second in return for the second supplying something which the second is better at producing AND that the first wants. By maintaining a world market of free trade, we - society, ARE better off in that we obtain the most efficiently produced goods and services at the lowest cost by leveraging that "specialization of labor".

In conducting any commercial activity, i.e., running a business, a proprietor cannot possibly achieve his/her goal unless he/she produces something that someone else actually wants - at an acceptable price. Therefore, the proprietor must necessarily align his interests (say, making a profit) with society's wants. Society's wants are manifold and ever-changing; and, we need to recognize that they are not so narrowly defined as "widgets". Those desires can and do, in fact, include things like clean air and health care services - and, unfortunately, alcohol, tobacco and firearms.

One of the reasons this model seemingly has not "worked" is that we have almost NEVER tried it. The economic history of the world is replete with examples of barriers to free trade which have no other purpose than to favor one group over another and have often been the result of coercion. Moreover, there are myriad examples of "brilliant" people who know how to plan what never could be planned . One example pertinent to American history is the wonderfully explosive growth in the American economy during the formative years of our existence which was fostered by nearly free trade. But that growth was less than optimal because of the proliferation of Tariffs and Embargoes in the early 19th century which ultimately led to the antagonism between North and South that shook a foundation that could not withstand the burden of the most heinous form of barriers to trade, slavery.

This is not to suggest that everything produced should be allowed to trade without restriction. For example, it is difficult for me to understand why we would trade with Afghanistan since it exports only 2 products: Opium and Terrorism. Likewise, I see limited value for trade with Cuba which exports Cigars and communism. Given the impoverished state in which the residents of those countries live, it appears they have very little to offer the rest of the world. One might argue those countries are not members of the world society. Nevertheless, they cannot produce everything they need by themselves so they must be trading with someone.

To return to the point - we cannot legislate, mandate, cajole, shame or otherwise interfere with the free operation of markets and expect there not to be unintended consequences which should more properly be described as unforeseen but which in no way can be attributed to a misalignment of interests. Rather, the crux of the compensation matter is the purview of the proprietor who, if he mismanages, should pay the price of business failure - in the case of public corporations, that means the shareholder who has taken the risk position not a government which has taken a rescue position.

"There is nothing the human will despairs of attaining through the free action of the combined power of individuals." AdT
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