"Character is destiny," remarked the Greek philosopher Heraclitus in the 6th Century B.C. This observation applies as much to nations as it does to individuals. And our current economic woes are, in large part, the repercussions of a national crisis of character.
Free markets, in order to function well, depend upon the virtue of their participants. The distrust engendered by vice raises wasteful transaction and monitoring costs to levels that can paralyze the marketplace. Moreover, vice leads to the phenomenon of "putting profits before people." This can be manifested in a variety of ways: by taking imprudent and excessive risks with other people's money; by selling products and services that harm consumers, families, and society; and by engaging in outright fraud. Today, of course, we are suffering from all of the above.
Adam Smith, recognized as the grandfather of the modern market economy, understood the link between markets and morality. Contrary to his common portrayal, he did not believe that a successful economy could arise from the raw, unbridled pursuit of self-interest. Himself a moral philosopher, he maintained that self-interest could fuel a successful economy only if it were narrowed by the constraints of traditional morality. Today, we are witnessing what happens when these constraints are relaxed.
But we have witnessed this before. Absent from the many comparisons made between our current recession and the Great Depression has been an examination of the moral disintegration that preceded each. The stock market crash of 1929, and the ensuing Depression, was precipitated by the "roaring '20s." That prosperous decade was marked by materialism and licentiousness. It seems as though the moral laxity of the cabaret and the bedroom were not so restricted, but rather extended to a certain moral laxity within the corporation and the boardroom as well. For the investigations that followed the Crash of '29 uncovered rampant corruption among America's boards and bankers.
Heraclitus would not have been surprised. Nor would have America's founding fathers. For they shared the perennial understanding that immorality and vice can rarely be compartmentalized. Hollywood's representations of honorable prostitutes and noble gangsters notwithstanding, most people who embrace vice in one area of their lives are likely to embrace it in other areas as well. A spouse who cannot be trusted probably makes for a director who cannot be trusted.
And although few seem to be making this connection today, it was not lost upon politicians and policymakers at the time of the Great Depression. In his 1932 presidential campaign, Franklin D. Roosevelt attacked Wall Street's "unscrupulous moneychangers" who knew "only the rules of a generation of self-seekers." He pledged to "restore [the] temple to the ancient truths," including "honesty," "honor," "the sacredness of obligations," "faithful protection," and "unselfish performance." Shortly after his inauguration, he went to work on the "moral reform of Wall Street," seeking to restore "traditional standards of right and wrong." Baldwin B. Bane, Chief of the Securities Division of the Federal Trade Commission at the time, stated that the securities legislation passed by Congress in 1933 and 1934 was based on a "moral ideal" -- the realization that the nation's economic ills were due to "the weakening of [America's] moral fibre" and "easy temporizing with traditional and tried standards of right and wrong." Joseph P. Kennedy, the first Chairman of the SEC, said that the SEC's most important objective was "spiritual," and that it sought "to prevent vice" in the securities industry. John Burns, the first General Counsel of the SEC, proclaimed that the "failure of morals and religion to put a bridle to the acquisitive motive[s] of business ... made the intervention of the law inevitable."
As with the 1929 crash and the Great Depression, today's financial meltdown has been preceded by a certain relaxation of traditional values. Generations reared upon the amoral precept that "if it feels good, do it" now lead many of our banks and businesses. Applied to economic matters, this precept yields the governing philosophy of many corporate enterprises: "if it's profitable, do it."
This suggests that our $1 trillion "stimulus" package is but a mere pain-reliever: at best a balm of temporary effectiveness that addresses the symptoms of our present ills, and not their cause. It also calls into question the competing proposals for regulatory reform that have dominated our national discourse. Some propose that the solution to our current predicament lies in greater regulation and more scrupulous governmental oversight. Others advance the argument that regulation has been part of the problem, and propose market-based curatives. Despite their merits, both sets of proposals miss the mark. Both can promise only limited success. And this is because a problem that is fundamentally moral in nature counsels in favor of a solution that is fundamentally moral in nature.
What would such a solution look like? Unfortunately, since morality and virtue are developed over time, via repeated decisions to choose what is right and to forego what is wrong, there is no quick fix to our present problems. Moreover, law can do very little to make people virtuous. Indeed, "coerced virtue" is oxymoronic.
But law can help foster an environment in which virtue can be developed and exerted more readily. We would do well to reconsider our abandonment of "values" education in primary and secondary schools, and should bolster the ethics training of M.B.A. and J.D. candidates in business and law schools. Corporate and securities law could be revised to enhance disclosure of, and shareholder input on, issues of moral concern. Directors and officers could be empowered and encouraged to take moral considerations into greater account, and unshackled from the constraint to operate their corporations with an unwavering focus on maximization of shareholder value. By providing instruction on basic moral principles, by sensitizing market participants to the moral implications of their choices, and by creating more opportunities where moral choice can be exercised, the law can play an important role in helping individuals grow in virtue.
Some, of course, will argue that it's too difficult to cultivate virtue. Simpler and more effective, they will suggest, would be more corporate regulation, stricter enforcement of antifraud legislation, and heavier penalties heaped upon wrongdoers. Such suggestions are certainly worth considering. But even under the best of laws, our resources and ability to prevent and detect wrongdoing will always be limited. Moreover, law's reach is itself quite limited: for regulation has an unfortunate tendency of preventing only a repeat of yesterday's wrongdoing; it oftentimes does little to forestall the wrongdoing of tomorrow. And this is inevitable, given the creativity and persistence of wrongdoers.
We need and can enjoy better protection from future corporate corruption, fraud, and the general dereliction of duty that lies at the heart of the economic calamities we are now facing. This protection lies not simply in a fine-tuning, an overhaul, or even a paring of our regulatory regime. It lies in a more virtuous markeplace. We ought to think seriously about ways in which to bring this about. For when no one is looking , and when no can catch us, or when there is no law to hold us accountable, or no other means of chastisement, the only thing that compels us to do what is right is virtue.