Goldman Sachs and Bank Pollution

By now most of you will be aware of the letter/op-ed article written by a disgruntled Goldman Sachs executive. He is resigning, and on the way out he is taking the time to lambast the firm’s culture. Rightly so. It is anti-client and, more importantly, anti-social.

As I have said repeatedly: I have no problem with business being anti-social provided that society maintains the means to correct that behavior and to keep it within bounds. This is why I am both pro-business and pro-regulation. I see no contradiction in being an advocate of a strong profit motive and an advocate of a strong regulatory regime at the same time. Capitalism is inherently an anti-social activity – by definition is is designed to accrue wealth to individuals who innovate or exploit opportunities. This means it flies in the face of democracy which is a system designed to provide equal opportunities with the hope that outcomes are less unequal, and that all of us share in the wealth being created because no individual is so isolated from society that he or she can truly be said to innovate independent of us all. All healthy societies are a complex mix of competitive and cooperative urges. The trick is to maintain a balance to extract the benefits from both and to live with the ensuing tension.

And it is exactly the unbalancing of the two that undergirds our current malaise.

By mistakenly imagining that the profit motive alone is necessary for wealth generation we have ignored its anti-social side effects, and have lost the strength that cooperation – usually as expressed through collective action – brings as a counterweight. In economics this shows up in an unhealthy bias – which I regard as ideologically driven rather than as scientifically derived – towards entrepreneurial activity or support of unfettered free markets. Neither are phenomena that thrive outside of a systemic setting that provides conditions allowing them to flourish.

So the proper discussion, in my mind, is about where to strike the balance between the conflicting demands of capitalism and democracy. Or, in business, between the opportunity for profit and the interests of other “stakeholders” particularly clients or customers on whose goodwill the business relies for sustainable profit streams.

Goldman Sachs has fallen prey to the virulence of pure profit. This is not threatening to the firm in the short term, indeed it creates the illusion of benefit since profits rise when any discussion of mitigation in support of stakeholders is taken off the table. It is the longer term impact that our disgruntled executive is pointing to.

Sooner or later clients realize that they are being exploited. They start to look for alternatives. And even in our highly concentrated banking industry where competition is way too concentrated there are alternatives. Eventually the short term relentless exploitation of clients transforms into an equally relentless undermining of the longer term credibility of the firm. This is an example of where a market can correct behavior. It is also why I advocate the break-up of our mega-banks in order to ensure more alternatives.

At one point in the distant past I tried to get my employer to use Goldman Sachs. It was clear to me that they were the best, their service was superior and their employees by far the brightest, attentive, and most innovative. I was overruled because of internal politics. That was over two decades ago. I doubt I would make the same decision again. The firm has become unmoored from the concept of client service. Its reputation is one of rapacious self-interest rather than of enlightened self-interest. The difference is enormous.

Getting back to my point that competition ought to offer a correction. This only stands if the culture at Goldman is unique and that alternative choices exist. It isn’t. They don’t. The cultural shift in the US economy has been towards an over emphasis on capitalism to the detriment of democracy. Our collective aspirations have been subordinated to such a degree that many claim that they don’t exist. Instead they imagine that the economic whole is simply the sum of its parts. They deny any result of interaction. They deny any concept of shared investment or shared outcome. They deny the existence of the “commons”.

When the idea of community is shoved so violently to the back seat, the stage is set for the antics and behavior that Goldman exhibited in the run up to the crisis. It also lays the groundwork for anti-social policy making, the disregard of environmental damage, and all sorts of other activities that would be limited in a less individualistic or atomistic culture.

The models and theories that embolden or give credibility to such behavior are both naive and artificial. They ignore the deep complexity of everything around us and the consequent interrelated nature of all activity. It is simply not possible for even the most brilliant entrepreneur to innovate in the absence of a multitude of prior existing and socially created knowledge. It is impossible for even the purest market to operate without a set of socially established rules to eliminate cheating and other sources of dysfunction. The existence of society and its accumulated knowledge, technology, infrastructure, institutions, social networks, and culture are what enables an economy to function. They are what enables a business firm to function. They are what allows an individual to earn a living. Privileging the individual, or the firm, to the extent that these resources are abused, denigrated, and eventually dissipated, will inevitably undermine the sustainability of the wealth that individual or firm hopes to extract.

In short: Goldman is on a self-destructive path. So is banking in general if it continues to ignore its clients and its proper situation within society at large.

This is why I support regulation. We need to place limits on what appears to be a highly toxic culture.

I don’t care whether Goldman destroys itself. I care whether it takes society down with it. And, as the crisis has shown, an unregulated banking system has the capability of damaging us all.

Banking pollutes in a very nasty way. We need to clean it up. As our disgruntled ex-executive is highlighting.