Saturday, August 27, 2011
Capitalism And Fraud
It's a complicated story with a lot of parts, but one of the recurring elements is intentional deception. I mean, cases in which banks and investment companies intentionally mislead, lie to, and try to deceive their trading partners and customers.
This got me to thinking about lying and fraud in business in a more general way, and about why you're not supposed to do it, and about why any particular business person would be motivated not to do it.
When you're in a normal moral context, it's natural to think of morality as a kind of "looking out for the other guy." I mean, you take other people, and their needs and desires, into consideration when you think about how to act. From that point of view, the reason not to lie is pretty obvious, because you're in doing so you're harming someone else or their interests.
Does this normal moral context disappear when you're in a business context? Sometimes it doesn't. Some transactions, like selling coffee or whatever, don't seem in tension with that point of view. If I have money, and you have coffee, and we want to exchange, we're each going to be better off after we do so, and this is consistent with each of us looking out for the other guy. So you might have some interest in putting the best face on your coffee that you can, but there would be nothing strange about your telling me the truth about its particulars and why you want to sell it.
But what Lewis describes in the finance industry doesn't quite seem like that, because everyone wants the same thing -- money -- and everyone's just making different and competing judgments about the best way to get it. If your reason for wanting to sell me certain stocks for money is that you think they're going to be worth less in the future than they are now, then there's a sense in which our interests are opposed, and it makes no sense to "look out for the other guy" in quite the same way. Why would you reveal your reasons for thinking the stock was going to go down? Doing so would make no sense. In this context, it would be strange for you to tell me why you want to sell.
So the prohibition against lying must have another source in that context. And I take it it does: the system depends on people being having good information about what they are buying; the system doesn't work when people lie; the mechanism of capitalist exchange, investment, and all the good things that come with it are only possible if people tell the truth.
But if that's the real reason why one ought not lie in finance, isn't it really unsurprising that in the absence of meaningful oversight and punishment, people do, in fact, lie? Because, really, even though I take it this is a powerful and good reason not to lie, it's also an awfully abstract and emotionally non-pressing reason. A reason it's pretty hard to get motivated by. There might be some people who might be worse off at some unspecified future time? Whatever.
And the temptations to lie must be significant: you're trying to keep up, and your job depends on making a certain amount of money for your company or its shareholders, and everyone else is making money, and you think that everyone else is lying. Against these temptations you have something like: it's wrong for me to lie because if people lie the system breaks down? You'd have to be Mr. Spock to put that sort of reasoning into action against your own immediate self-interest.
It might be thought that the motivation not to lie, even in the absence of oversight and punishment, comes from some self-interest: that the person who lies is going to get a reputation for lying and people won't do business with them again. But this would only be true if a lot of people had information that -- especially in the absence of oversight -- people just don't have. Without someone looking over your shoulder, you can actually get away with it.
One of the other main themes of the book, of course, is how pathetic and weak any actual oversight is these days. But that's another story.