Would Trustworthiness Balance the Self-Interest and Controls?

July 30, 2016

 

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." - Adam Smith, The Wealth of Nations.

 

Above is the famous quote from Adam Smith in support of the argument "how self-interest in free market" creates the necessary demand and supply condition resulting in productive economic transactions and the wealth in a society. Those who quote this statement of Adam Smith in support of the free market idealism, often fail to recognize the moral intentions of individuals and moral hazards in trusting fellow men emphasized by Adam Smith - which also underlie this demand and supply dynamics and creation of wealth. Actually, it is 'enlightened self-interest' that Adam Smith reinforced in his work. In the absence of morality and enlightenment, free-market can quickly turn into a 'Hobbesian jungle' (The condition of man .. is a condition of war of everyone against everyone). At the outset, let us remind ourselves, within a few decades of the Adam Smith's above publication, the colonialism and unchecked free trade caused one of the biggest famines of all times - Irish Famine - just in the Adam Smith's neighborhood disproving his theory of invisible hand's efficiency - In 1840s close to million Irish farmers died of malnutrition lacking even potatoes and corn to eat.

 

Before Adam Smith's invisible hand 'self-interest' creating wealth, there are other powerful systemic, social forces that hamper the efficient functioning of demand and supply mechanisms. While self-interests may naturally entail a gentle and mutually cordial transactions and relationships in a small village or town, however as the size of the market or the volume of transactions and population in a system increase, there are many invisible and frictional social forces that arise due to moral hazards which can hamper the efficient functioning of markets and can cause distrust, and derail the self-interest dynamics into greed, poverty, apathy, ennui, and gluttony, and thus generating social disturbances and class warfare. 

 

As Adam Smith concluded in one of the essays in his 'Theory of Moral Sentiments', "This disposition to admire, and almost to worship, the rich and the powerful, though necessary both to establish and to maintain the distinction of ranks and the order of society, but to despise or at least to neglect persons of poor and mean condition, is at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages."

 

With the rise of moral corruption and greedy tendencies to further aggrandize the wealth and power often resulted in steep inequality, economic turbulence, and political upheavals weakening the national interests. It is quite obvious and inevitable that moralist views have naturally given credence to the collectivist and utilitarian argument that power and wealth if unchecked would result in deprivation of basic rights challenging the very existence and decent life. The collectivist argument can sway to the right with nationalism as the core political ideology or can swing to the left in favor and support of poor working population. Either way political bandwagons can be pushed to the extreme destabilizing the socio-economic-political structure in any society. 

 

Distrust and moral hazards are further exacerbated by various social and systemic frictions. One of the important frictional forces engendered within a large society or organization is ' information asymmetry '. The other major force of friction is 'bias' created by diversity of interests, social groups, and fashion, fads, and short-term interests. Then of course, the acts of god that derail the demand and supply equilibrium quite often moving the balance of forces to a new state. Globalization is another new phenomenon that further complicates the problems of information asymmetry and bias. 

 

The objective here is not to take an ideological or political stand for the discourse, rather to suggest how to reduce the information asymmetry and bias in the market system that skew the advantages, transactions, contracts, wages and returns in favor of some. All of us are aware of the popular extant recommendations offered in the form of leveling the playing field, anti-trust monopoly restrictions, minimum wages, labor laws and standards, taxes, social security and public welfare schemes to offset the problems created by inequality, national debt, and aggrandizement. 

 

Notwithstanding the corrections rendered by democracy driven choices and alternative political solutions, the problems of information asymmetry and bias are still major systemic challenges affecting the efficacy of both market and government/ organizational methods. Despite democratic revolutions, radical transformation and populist governments making all sorts of corrective measures to increase the market efficiency and curb the excesses in the past 250 years after Adam Smith, the information asymmetry and social biases are still the underlying causes that increase the conflicts among various sections of society. 

 

                "From American revolution to Lincoln's civil war,

                 Theodore Roosevelt's Anti-trust campaigns, and

                 FDR's Industry recovery act, & New deal, to the

                recent Dodd-Frank Wall Street Reform act, all would

                qualify as political and market corrections." 

 

The government organizations have been equally at fault and being inefficient hampered by corruption, bureaucratic delays, lack of responsiveness, and lack of consensus and so on. Since governments often sway from left to right, and right to left without any consistent policies and strategies the corrective measures have weaker impact because they are pursued haphazardly. Rising population, globalization, resource crisis, and border-less markets and firms are further exacerbating the crisis more and more and are weakening national economies. This is one of the reasons why European union is facing deep fissures within and among the member states.

 

Although right to information acts, transparency regulations, and the free access to information available through internet have reduced the bureaucratic distance between people and the governing institutions, however the level of distrust between governing bodies and the citizens has been steadily increasing. Now, the public trust over democratic institutions - be they are national or local - legislative bodies, judicial bodies, law enforcement organizations, and financial and business systems are at an all time low. 

 

No doubt, the internet and communication technologies have reduced the distance and time barriers, and enhanced the efficiency of organizations. However, the trustworthiness and transparency of governing bodies are being marred by incompetence, lack of integrity, and decline in public goods which we get to see from the media on a routine basis. Enhancing trustworthiness and transparency at every level within the organizations and society, and creating more public goods will be the primary challenge for leaders; and these are the only real solutions to reduce information asymmetry and bias and for building peaceful nations assured with growth in standard of living, quality of environment and quality of life for one and all. 

 

Trustworthiness and transparency can be augmented in many ways. Autonomy to operational units, increased professional and local controls, right sizing of public /civic entities, increased inclusiveness and representativeness with diversity and stakeholder inclusion in governance systems, employees and stakeholder participation in corporate boards, incentives and rewards in the form of structured ratios and slabs rather than arbitrary market selections, and stringent controls on corruption through keeping the books of both private, public and government entities transparent. Modern technologies such as mobile communication, GPS, and internet can play an effective role in matching the right demand with right supply of information, manpower, capital, expertise and critical resources.

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