I had a student many years ago who, after flirting with medical school, ended up in the world of finance, as an options trader. He was extremely successful, and became wealthy. He and I maintained contact after he graduated, and his name came up one night when my wife and I were having dinner.
"What does he do, again?" my wife asked.
"He trades options. He's an investor," I replied.
"No. No. I know that. Who does he work for? Who does he trade for? Who are his clients?"
"He has no clients. He trades for himself."
My wife pondered this for a moment, and then ended the conversation with, "Oh, I see. So he makes money for a living."
Just so. He made money for a living. Everybody makes money for a living, but most of us actually do something that has a point, in addition to just making money. We examine and treat patients, we teach students, we draw up contracts and wills, we write for newspapers, magazines, and web sites, we clean floors, or we serve meals. That is, we engage in some activity that has an effect on the world. We surely wouldn't be doing whatever we do if we didn't get paid (except, maybe, for writing for web sites), but there's more to what we do than just the paycheck. If we're lucky, we love and value our work. But even those who are not so lucky can find meaning in their jobs and take pride in doing those jobs well.
I think it's worth keeping the distinction between "working for money" and "working only for money" in mind as we contemplate the current collapse of the world financial system and the growing, populist anger at bankers who reaped millions in bonuses while allowing their companies to fall apart. Yes, the bonuses were obscene. Yes, they came to seem even more obscene as we found out how badly the banks were being managed. And yes, it is appropriate to rein in executive compensation as a condition for banks receiving taxpayer handouts. But if we think that reducing compensation will solve the current crisis and prevent a recurrence, we're mistaken. We're also mistaken if we think that "smarter" as well as smaller incentives will do the trick. We have a deeper problem. We've created a culture in which, like my former student, most of the major players "make money for a living."
If, thirty years ago, you casually asked a banker you'd just met at a cocktail party "what do you do?" a common answer might have been: "I make loans so people can buy or improve houses, or expand their businesses, or start new ones" or; "I invest in new businesses," or; "I help people build adequate nest eggs for retirement." If you'd asked a few months ago, the answer to the "what" question might more likely have been: "I make money. By any means possible. Let me tell you about this great scheme of slicing and dicing risky loans into marketable securities."
Of course, bankers were always interested in making money. But when bankers had clients, they bore some responsibility for the clients' welfare. Meeting client needs and helping clients achieve their goals were a central part of the bankers' day-to-day activities. These responsibilities to others established standards of conduct and set limits on the pursuit of high returns. But about 30 years ago, many large banks started to change what they did. "Why work for clients," they wondered, "when we can make more money just doing deals for ourselves?" As proprietary accounts came to dominate investment banking, the bankers became folks who just made money for a living. That was it. There were no interests, other than theirs, that needed to be considered. And I think this change has as much to do with our current financial predicament as the shameful lack of regulatory diligence ushered in by the Bush administration. President Obama will certainly do his best to make sure that we take regulation seriously again. But there is no regulation that can not be subverted by people of bad will, just as there is no incentive "smart" enough to insure against the future mismanagement of companies. Sure, we can "incentivize" against the current form of corporate bad behavior, but then we can just sit back and wait for that bad behavior to morph into a new, perhaps more sophisticated form. It is worth remembering that the "perverse" incentives that generated the most egregious recent behavior in the financial world were hailed only a few short years ago as the "smart" alternative to what had gone before.
At a press conference on December 18, then President-Elect Obama said of the major players in the financial drama that "they must ask, not just is it profitable, but is it right." But whereas we may have some idea what "right" means when a banker serves clients, what does "right" mean to someone who makes money for a living? Better regulation and smarter incentives -- sticks and carrots -- may help in the short run. But something more is needed in the long run. We have to reintroduce a point to banking aside from just making money.
It's not just banking that has become "making money for a living." You might once have asked a steel manufacturer "what do you do," and been told "I manufacture girders that provide the infrastructure for office towers." Now, if you could find a steel maker, he'd tell you "I make money. I just made a great deal, closing my steel plant in Indiana and buying shares in a Korean steel company." A pharmaceutical executive who might once have said, "I make drugs that prevent and cure disease and ease suffering" might now say "I make money. Let me tell you about this great line of 'copycat' drugs we've developed to protect us from patent expiration." A newspaper-publishing conglomerate CEO who might once have said "I contribute to democracy by keeping citizens well-enough informed that they can be intelligent participants in the political process" might now say "I make money. I've just finished trimming down our news division, and channeled the savings into our 'first-person-shooter' video game division."
When the work people do involves aims that are appropriate to banking, steel making, drug making, journalism, or anything else, how people do the work is more likely to take care of itself. The obligation to meet the needs of clients or customers establishes standards of conduct that impose limits on what people will do in the service of profit. But when the work people do is only about making money, how they do it becomes "by any means possible." Under these conditions, we have only two flawed tools at our disposal to protect us from abuse and exploitation. We can try to turn the greed that we just take for granted as "human nature" to our advantage by using incentives to leverage behavior in a better direction. Or we can try to overwhelm greed with fear (Thomas Hobbes' advice to us in The Leviathan), by reaching for the stick of regulation and punishment. What we can't do is expect people to ask, "is it right," nor can we expect them to have any clue what "right" means.
Sure, we need to regulate financial industries better, and we need to eliminate perverse incentives. But what is left out of this mix of carrots and sticks is character: the commitment and knowledge to aim at the right thing. A critical purpose of banking is to serve others. Carrots and sticks don't teach character; they substitute for it. And worse, over-reliance on carrots and sticks can have the perverse effect of eroding the motivation to do our work well.
Years of research in psychology has shown that rewards and punishments can be very effective in changing behavior. But, at the same time, they can create an addiction to rewards and punishments. Behavior that might once have occurred for other reasons (for example, because it's the right thing to do) will now only occur when the reward or punishment dispenser is watching. Even if the rules and incentives for bankers could be designed exactly right -- which is highly dubious -- how could we trust that bankers wouldn't find a way game the system, discovering shadows that the regulators' flashlights don't illuminate? The banking system, as we've painfully seen, only works when there is trust, and when the system depends entirely on regulation and incentives, "trust" becomes an empty word. The problem with the slogan "trust but verify" is that ever increasing attention to verification gives the lie to the notion that there is any trust.
Over the last few decades, we've developed an implicit attitude that everybody "makes money for a living." For example, just recently Chief Justice of the Supreme Court John G. Roberts has been on a mission to raise the salaries of judges. Whereas forty years ago, judges out-earned senior law professors and law school deans, they now earn less than half as much. Indeed, the real income of judges has dropped during this period. Roberts' argument for salary increases is not about justice or fairness. Who is to say what a "just" or "fair" salary is? No, the argument is about efficacy: if we want to retain good judges and entice good lawyers to leave their lucrative jobs with firms, or their cushy appointments at law schools, we have to pay them more.
This certainly seems like a reasonable point of view -- a view that, given the ethos of our times, needs no supporting evidence. Thus, it is surprising that recent studies of judicial performance suggest that the reduced real income of judges has had almost no effect on retention, productivity, or quality of performance. The authors of these studies were certainly amenable to the argument that judges should be paid more if the evidence -- some sort of cost-benefit analysis -- warranted it, but their conclusions were that the evidence did not suggest that a salary increase was needed.
Why is this result surprising? I think it's because everyone just takes it for granted that "you get what you pay for." What I want to suggest is that perhaps "you get what you pay for" is the wrong way to be looking at the issue.
What do we want in a judge? In addition to knowledge of the law, we want honesty, integrity, dedication, and wisdom. Is there any reason to believe that higher salaries will buy us more of these virtues? On the contrary, I think the evidence from our current economic collapse suggests that there is a negative relation between salary on the one hand, and honesty, integrity, dedication, and wisdom on the other. Raising salaries will succeed in getting us judges for whom high salaries are important. But what makes anyone think that these are the kinds of people we want? Instead of putting scarce resources into salaries, we should be spending money to improve the conditions under which judges work (manageable case loads, able assistance, room for judicial discretion, and so on) so that it is actually possible for judges to perform their work virtuously, and also possible for virtuous people to want to be judges.
The same arguments apply as we try to recruit more and better teachers and more and better primary care physicians. They certainly should be paid enough -- enough to lead decent lives and see to the needs of their families. But beyond that, resources should go to making the conditions under which they work adequate for them to do their jobs well. Enticing doctors or teachers with high salaries will get us the kinds of doctors who prescribe the drugs made by companies that give them perks or kickbacks, and teachers who focus their efforts on getting students to do well on the tests that will determine the teachers' compensation.
There is no reason to assume that money buys us the things that matter to good judging, teaching, or doctoring. We should leave the people who are motivated by the prospect of large financial rewards to work in occupations where making money is the only point, and seek people motivated by other things for professions that demand qualities of character that are not especially compatible with "making money for a living."
Lest I be accused of being simplistic, I want to acknowledge that it is possible for people to operate with multiple motives. It is possible to pursue wealth while simultaneously pursuing justice, or excellence in teaching, with honesty and integrity. My point is only that there is no reason whatsoever to believe that more money will get us more of what we want in judges, or teachers, or doctors (or even bankers). And there is some reason to think that it will get us less.
What I find especially interesting, as pundits debate the likely consequences of lowering the ceiling for compensation for heads of financial firms, is that many of the people who worry about a "brain drain" are not, themselves, doing what they do for the money. Nor would most of them be lured away from their efforts to influence public opinion and affect public policy by an offer of more money to do something else. The pundits are "better" than that. Yet, they believe that most people, including bankers, are not.
In an ideal world, nobody's work would be just about the money. People could pursue excellence in what they do, take pride in achievement, and derive meaning from knowing that their work improved the lives of others. In keeping with Rahm Emanuel's wise observation that you should "never let a crisis go to waste," perhaps we should take the current crisis as an opportunity to pursue such an ideal world. Perhaps we should use the current crisis as an opportunity to remake the work that many people do.
If people were reminded that there is a point to what they do, in addition to making money, regulation would be ever so much easier, and incentives would be less important. If people could be reminded that what they do has, and is meant to have, a significant effect on the lives of others -- that virtually every form of work is, in this sense, moral work -- then making money, by any means possible, might stop being the only thing that guides people's conduct. Proper attention to the moral dimension of the work people do will not be achieved by ethics courses, nor will it be achieved by regulations and incentives. It will only happen if it becomes a norm that suffuses the daily practices of our business leaders and the organizations they run.
A primary aim of all these money-making and profit-driven corporations has to be a dedication and service to others. Built into decision-making algorithms, risk models, and business plans should be this question: how can we do well by doing good, by serving our customers, clients, patients, and students as they are meant to be served. Better regulation and smarter incentives will perhaps protect us from really bad bankers (and drug makers, teachers, doctors, and newspaper publishers), but it will never get us good ones.