Creating Real Value - Capitalism Quo Vadis?

I just got the transcript back from my talk in Brussels on Nov. 14 last year. It was at the European Parliament and the theme was "Being Bold - A Key to Sustainable Success?" as part of the International Business & Leadership Symposium, sponsored by the International Association for Human Values.

Here is my speech:

Thank you very much for having me here. It’s a delight to be here.

Who knows what the origin of the current financial crisis is? Raise your hand - zero.

Does anybody have a policy recommendation for the current crisis? Okay, zero.

I’m going to do a brief tour of the horizon. I apologize for my slightly American-oriented talk today. The crisis is believed to have originated in the United States, so I think it’s a bit appropriate.

So on the plane ride over here, I gathered a whole bunch of analyses of the current crisis, let me just give you a sort of tour of the horizon; from the least good to better. I’ll start with the publishing millionaire Steve Forbes. He believes that the main problem was bad monetary policy. The loose dollar, the dollar fluctuated too much and dropped in price, weakened, and he advises that America tie the dollar to the gold standard and lower taxes. He even proposes a flat tax. I even see that the value of this analysis, although I don’t agree with much of what he is saying, is that there is a need to lower taxes and create stability in order to drive incentives to do the right thing. Now, I don’t agree with his policy prescription, but I understand his goal.

Second guy, Martin Wolfe, it’s a bunch of white guys, sorry, but then again it’s an American perspective. Martin Wolfe, I think is a British economist, he’s a Financial Times columnist. He says the opposite of Steve Forbes. He says we need to grow the American deficit world-wide, we should also raise taxes, including a value added tax and tax energy consumption. And he says, we should demand fiscal stimuli from countries with trade surpluses while we keep trade open. Trade open is good but I don’t know how we demand fiscal stimuli from them. We’ll see how it works?

Next guy, Tom Friedman, columnist for the New York Times, has been going around talking about what he calls the need for a ‘green’ bubble. He subscribes to the idea that bubbles are inevitable and we might as well get some use out of it. Previous bubbles have included the railroad bubble in the United States, and then the IT bubble out of which both the United States enjoyed productivity gains. Generally speaking the current bubble resulted in a bunch of empty houses that we can’t really produce much out of. Related to that is former Vice-President Al Gore’s idea of looking at the crisis as three inter-related crises: energy, climate and finance. And that as far as technology and long term investment, and I’ll talk about long term investment later, you necessarily solve all the crises at once, i.e. if you have long term investment in energy infrastructure, you can solve the energy crisis, as well as the climate crisis.

Related to that and going a step further and looking at the causes of the crisis, Cass Sunstein, who is a major figure in the Obama administration and influential at Chicago and other universities, describes the current crises as what he calls a mixture of what he calls “bounded rationality,” which means you act rational but you don’t know what the environment is, so that limits the amount of rationality you can exhibit. And number two, “temptation or fragility of the human condition,” that if you are tempted to just take a little bit more, you will probably do it. So he suggests the need for more transparency in that to take these complex systems, not necessarily destroy them, but make them more easily understood.

That was just one stack I had and I hope that gives you a fairly ambivalent tour of the horizon. Now let me take it into the ethics part. Rather than going in to a policy prescription on how to save capitalism, as Steve Forbes tried to do in the cover article of Forbes magazine, let me give you some ethical principles that we might draw from, in order to reach a negotiated policy approach.

Okay, at the Carnegie Council for Ethics and International Affairs , a ninety-five year-old institution in New York City, we’ve started to espouse a set of three principles that we believe are helpful in the creation of policy formation and agreement. The three are: fairness; rights and responsibilities; and pluralism. And I’ll go quickly through them.

Fairness is basically a way out of prisoner’s dilemma. If you and your negotiating party both believe that you’re operating on the principle of fairness, then burdens and benefits can be shared equally. There’s a game called the ultimate game, it’s a little elaborate, I’m not going to go into it right now, but basically it’s an experiment with different people who have different control over the outcome, and people generally will prefer a fair outcome over one that benefits that benefits them unfairly or disproportionately.

Second, rights, you know God has been invoked here quite a bit and spirituality, and I’m okay with that, but I think that a lot of people, including the Dalai Lama, whose written this fabulous book, “Ethics for the New Millennium,” says something that we agree with at the Carnegie Council, which is that religion tends to make people angry, so we like to talk about ethics as a stand-in, or a practical way of going about it. And some people say that we are born with rights from God – that’s fine, but I think that rights are also a practical matter: if we didn’t have rights, we would need to invent them. Several atrocities in mankind’s history show that we need to have a concept of human rights, and with them goes the responsibility to protect other people’s rights, you can’t just have rights for yourself.

Third, pluralism. Pluralism is a way to get around monism and relativism. It’s in-between, and I like to call it a sort of golden mean – right in the middle. Monism is to say, “my way or the highway.” Relativism is to say that anything goes. We like to say that pluralism is a better way to address problems. It’s bringing everyone to the table, it’s creating a more sustainable and a better-informed solution.

I am going to propose something a little bit playful. I wrote an article about a year ago, an attempt to promote a new idea of fair trade. There was this idea in America, very popular among the Democrat congress members of creating a fair trade policy, rather than just a free trade policy.

Okay, what does that mean? It could be protectionism in disguise – how do we get from an unfair policy, one that cuts off the chance of poorer countries of tapping into the benefits of the trade system. How do we do that? Well, I suggested that trade might not be completely free, nor completely regulated. Again, something in the middle, a golden mean.

So, I talked about three freedoms that we might think about truncating or limiting or sacrificing: the freedom to trade with anybody; the freedom to trade anything; and the freedom to trade with impunity. This was something I put together for a trade policy paper, but I think it’s actually quite relevant for the financial crisis. The freedom to trade with anybody: if you’re selling something to somebody who doesn’t know what’s contained in this box, it’s a package that is opaque, it’s not a very good business deal. If you’re selling things that are shoddy or mysterious, that’s also not good business, and you should be responsible for your actions that result from the trade that you make. There is a great deal of business literature I can go into later on which suggests that if you’re benefiting from the externalities of your business relationships, then you do in fact have a duty to ameliorate them.

Now, I was going to go into a few concrete ways of how to make this practical. This came about a few weeks ago, Prof. John Ruggie of Harvard University, who is the United Nations representative for Human Rights. He came to our institute recently to explain his new mandate. His colleagues at the United Nations have been so happy with his work, which is essentially a survey of companies, that they have extended his mandate for another three years.

After he gave his impeccable, magnificent talk, on business and human rights and the challenges, I asked him: “Professor Ruggie, I am going to be talking about the future of human rights and capitalism in Brussels next week, can you tell me what I should say?” And he said, Okay, ethical capitalism, that sounds interesting, "well sure." He said that you can’t force people to be ethical on their own, rather you have to embed incentives in the system to encourage people to be ethical. And I would add to that that you have to create a system of incentives that are based themselves on ethics, and that’s the challenge. You know, I was watching TV the other day, a news report on these hedge funds, and the bosses saying, “Hey, you know, we didn’t break the law.” So, you have to give them the opportunity to do good.

So, I will just briefly go over some incentives: having prices reflect their true value; re-examining fiduciary duty – I know some of you might be a little skeptical about this. I have a forthcoming manuscript for a book, it’s called, “Sustainable investing: the art of long-term performance.” And the chapter I have here is Stephen Viederman's chapter on fiduciary duty, and one of the things he says is that we should take a look at the original words that we used to describe fiduciary duty. Number one was profit, and the other one was prudence, and both of them imply more long-term thinking. Profit was more for the welfare of people, rather than simply benefiting, and prudence was simply long-term strategic thinking. So his argument is that it is a return to basic principles.

Another one that hasn’t been talked too much about here, but I was going to mention it briefly, and that is a very hot topic in New York City, is Web 2.0, and it’s ability to supercharge corporate social responsibility. It’s an accelerator and a facilitator of what Bill Drayton, the found of Ashoka tells me he calls “the awareness tipping point,” where enough people are aware of what’s going on, they are aware of their connection, their interconnectivity with people, that they are going to create a new movement.

Web 2.0, which is social networking, social interactivity on the internet, is facilitating this awareness. I will just draw your attention to this article which is very popular, in the New York Times, about Google using its data from its search engines to track flu. Well, this reminded me of some of President-Elect Obama’s ideas, how he can connect with his massive database of emails. Beyond the “Walmart sucks!” type of websites, beyond that to a more positive engagement, politicians are thinking about this, to what was the result of a long-term workshop

I was engaged in with SAP, which is essentially how do corporations like technology companies help to build trust, which is again one of the main themes of this conference, between civil society, companies, consumers, investors, and with the understanding that has been mentioned earlier that all these identities are fluid and overlapping, they are not discrete. Finally, there is another theory about the way that emerging value is measured in this new economy – a more globalized, connected economy.

I have tried to coin a term I call the “empathy economy,” to describe a theory that processes are now global. That business processes, human resources, skills, knowledge, data are all part of ubiquitous computing, and it has driven down the price of data and knowledge, and driven up the value of empathy, design, innovation and ethics, broadly speaking. One study I saw on the impact of intangibles on valuation and brand, and I’ll conclude with this, was a survey of how intangibles affect brand, and therefore valuation. Number one was ethical leadership. The next two were social and environmental stewardship.

Thank you for having me speak today.

America, Japan, Poland, and Turkey as Great Powers in 21st Century

STRATFOR head George Friedman recently gave a fascinating talk on the next 100 years of geopolitics to the Public Affairs program at the Carnegie Council. You can watch it here. Some interesting points here:

The great powers in 50 to 100 years will include Japan, Poland, and Turkey. His analysis starts from his assumption that the United States will continue to be the dominant power in the international system for many reasons, including access to two large oceans, a powerful navy, enormous wealth, experience dealing with immigration, and a lack of rivals. Poland will benefit from the fact that it faces Russia. Like the U.S. relationship with South Korea, the United States will make sure that Poland succeeds, through technology transfer for example, so that it can balance Russia.

As for Japan, well, it has the second largest economy, a powerful navy, and an army larger than Britain's--all of this with a constitution that doesn't allow these things. Imagine what may happen when Japan modifies its constitution, Friedman says. (Friedman's analysis goes against recent bleak economic news in Japan.) As for China, Friedman "is not impressed." It is basically a poor country that is divided and lacks a social safety net. When people become unemployed in rich countries, they worry about welfare, when they lose their jobs in China, they worry about real poverty.

Meanwhile, Turkey will become ever more important in managing conflict in the Middle East. The key to Friedman's analyses is that it is important to throw away conventional wisdom, for example that Russia, India, and China will dominate the future.

On Joe Nye's concept of "soft power," Friedman has an interesting take: He says soft power is when you can exert power but choose not to. In his view, it is not "attraction" as Nye puts it. Friedman's version came to him from growing up in the Bronx where "you can get more with a smile and a gun than with a smile alone."

Resilient Cities

I just attended a hopeful presentation by Australian urbanist Peter Newman on his concept of Resilient Cities. We're at the toxic intersection of several trends: peak oil, global warming, and scattered, car-dependent residential growth fueled lately by subprime mortgages. According to data he presented from the UK Industry Taskforce on Peak Oil and Energy (Nov. 2008), "the underlying trend in the price of oil is 6 percent growth per year." Combine this with the IEA's recent World Energy Outlook that says the "natural annual rate of [oil output] decline is 9.1 percent from 2009" and it becomes pretty obvious that massive changes in our energy and transportation infrastructure and technology are around the bend.

Newman lists four courses the modern city may take:

Collapse: It's happened before and could happen again. Newman cited the ancient examples of Ephesus and Babylon, and while total abandonment seems less likely in today's world, a tour through Rust Belt American cities such as Gary, Indiana, should suffice as a warning of potential decay.

Ruralization: Food production moves to the cities somewhat, as happened in Havana when the Soviet Union cut off energy supplies. Total ruralization with every apartment complex growing its own food seems unlikely because it would disrupt the whole logic of the city as an opportunity factory.

Division: Wealthy eco-enclaves will coexist with and be surrounded by Mad Max suburbs. This is a highly probable outcome if market forces play out sans smart urban and regional planning. This pattern is already prominent in the developing world where gated communities abut slums.

Resilience: Combining all the dream elements of renewable energy, distributed systems, smart grids, carbon neutrality, and sustainable transport, resilient cities are basically environmental utopias--only impossible if viewed as overnight projects. Alone among these four types, resilient cities are founded on hope not fear, though division, ruralization, and collapsing neighborhoods may all accompany the transition to resilience.

Newman focused today on the fact that land use follows transport, thus illustrating the importance of public transit-oriented development. His sense is that the stimulus and transportation initiatives of the Obama era must move dollars from freeway construction to sustainable options. Spending $100 million per mile on a freeway, as Houston did, seems like Stone Age economics at this point.

I suggested to him that transition to high gas mileage electric vehicles (100+ mpg) might forestall investment in public transit, but he seemed optimistic that, given the bigger picture of climate change pressuring the economy, plug-in cars and vehicle-to-grid technologies will prove a win-win situation. Let's hope he's right.

Siddharth Kara at the Carnegie Council

Earlier this month at the Carnegie Council for Ethics in International Affairs, Siddharth Kara discussed his latest book, Sex Trafficking: Inside the Business of Modern Slavery. Kara provided a rare business analysis of the sex industry, looking at supply and demand factors, profitability, and growth of the industry, and shared first-hand accounts of its victims.


Kara began with a narrative of a young girl from Albania, "Inez," who had been kidnapped, repeatedly raped, smuggled over the border, and forced into prostitution. When she managed to escape after two years, Inez was shunned by her father and forced to live on the streets. She was promised work in Italy, but was again brought into an international sex trafficking ring. Inez was detained by the police for having false documents and when she was released, the police forced her to return to the men who enslaved her. This time, Inez became pregnant and when she was able to escape back to her home, her family again shunned her and her child.


According to Kara, Inez's situation is illustrative of some key components of the sex trade:
-economic deprivation makes individuals vulnerable to exploitation
-victims are quickly broken down by physical and psychological torture
-trafficking victims often endure a cycle of exploitation, and even if they do manage to escape, they are thrown back into the same conditions that led to their initial enslavement.

Kara identified two principal drivers of the sex trade industry as high profitability and extremely low risk. Worldwide sex trafficking brought in $35.7 billion in 2007, making it the most profitable illicit industry next to the drug trade. In India, profits of approximately $12,900 per slave per year can be generated by exploiting sex slaves, while the only criminal penalty for the practice is a $44 fine for owning a brothel.

Even when stiff penalties are written into law, levels of prosecution and conviction of sex slave exploiters tend to be minor, due to corruption, poor witness protection programs, insufficient evidence gathering, a lack of cross-border cooperation, and other factors.

The best near-term solution to the illicit sex trade, according to Kara, is to reduce aggregate demand by attacking the industry's profitability. Commercial sex is a highly elastic product, so as price increases, consumer demand decreases. In order to attack profitability, Kara recommends elevating risk.

Four main impediments to dealing effectively with the illicit sex trade were identified: the crime is poorly understood; NGOs dealing with the issue are underfunded and poorly coordinated; laws against the crimes are poorly enforced; and few people have a detailed economic understanding of the industry.


Kara outlined seven tactics to reduce demand, elevate risk, and shorten the duration of enslavement:
-the creation of an international slavery and trafficking inspection force similar to United Nations weapons inspectors
-community vigilance committees trained to report signs of potential slavery to local police or trafficking inspection force
-targeted, proactive raids on establishments suspected of slave-like exploitation
-increased funding for salaries to police, border patrol, prosecutors, and judges to decreased risk of corruption
-special fast-track courts to prosecute crimes, with international observers and judicial review
-fully funded witness protection for slaves
-increased financial penalties associated with sex-slave crimes




Kara admits that the challenges to ending sex trafficking are immense, but believes that with increased resources and awareness, it can be done.

Slaughter on DPRK, Burma, and China - "Support democracy abroad"

I just heard a fantastic presentation by Anne Marie Slaughter at the Carnegie Council before she heads off to Foggy Bottom, apparently to take the head of policy planning position at State Dept. She made a powerful case for a truer Wilsonianism during the Obama administration. Central to Wilsonianism in the 21st Century will be about creating progressive policies at home, “supporting democracy abroad,” and entering into pluralistic deliberation among our peers on big policy questions such as armed intervention.

George Packard, head of the US-Japan Foundation, asked what this approach would mean for U.S. policy toward North Korea and Burma. Slaughter said that starving people, such as the North Koreans or Burmese, does not necessarily help the people or hurt the regime. By contrast, engaging with these regimes, by sending aid for example, does not necessarily help the government or hurt the people. In other words, there is a good case for engagement with both.

Slaughter saw parallels with the story of China—call it a China model of understanding potential change in North Korea and Burma. In other words, it is not the case that the richer a country gets, the more it desires liberalism. We should not necessarily expect liberal democracies to spring up from economic growth and openness. But we do see, such as in China, that people demand a greater voice as they get richer. As the people demand more voice, they demand more accountability from their government and policies that are more equitable.

Ian Bremmer's Top Ten Political Risks for 2009

Eurasia Group's Ian Bremmer just released the firm's top ten political risks for 2009. We will feature a panel discussing the ethical implications of these risks with Ian Bremmer, Michele Wucker, and Art Kleiner next week, on Jan. 13, at the Carnegie Council. Sign up for the event at gpievents@cceia.org.

Here is how Ian summarizes the top risks for the year:

First, we’ll see more state intervention in the global economy. Second, that intervention will be both reactive and uncoordinated by a series of local, regional, and national political actors who have decidedly non-global (and in many cases non-market) views of the cost/benefit equations that attend their policy decisions. In short, politics will drive the global economy more directly, and more inefficiently, in the coming year than at any point since World War II.

Below, we present a truncated excerpt of the ten risks:

1. Congress - Political risks have historically been most important for economic outcomes in emerging markets, but that’s not so this year. The current financial crisis has created an unprecedented space for government interference in economic affairs within developed states, as well. Nowhere is that more true than in Washington.

2. South Asia Security - The security environment in India, Pakistan, and Afghanistan will deteriorate significantly over the coming year, and the United States and Europe will find themselves more directly involved in conflicts in all three states, with little benefit to show for it, by the end of 2009.

3. Iran/Israel - The likelihood of the United States launching strikes against Iran has diminished considerably over the past two years, due both to internal policy wrangling between Vice President Dick Cheney and others within the Bush administration and the election of Barack Obama as president. But 2009 is the critical year for conflict (both direct and through proxies) between Iran and Israel.

4. Russia - We enter 2009 with Russia in play in a way we haven’t seen in decades. The relevant comparison isn’t 1998, when the Russians engaged in default and devaluation but remained within the bounds of their existing political and economic system (as Lenin said, two steps forward, one step back). The history to consider is 1989—as key aspects of the Russian system could change for the worse.

5. Iraq - Frankly, Iraq at number five is a good news story. With about 140,000 American troops remaining on the ground and no serious evolution of the Iraqi political model, it’s a testament to the relative improvements of security that Iraq has managed to claw its way away from a risk that keeps the world on edge.

6. Venezuela - President Hugo Chavez has made a habit of miscalculation over the years, but this may be the big one. His plans for a referendum in the coming month to reform the Venezuelan constitution and abolish term limits (which would allow Chavez to run again for the presidency in 2012) show little likelihood of success. Then the Venezuelan president will have a real political fight on his hands.

7. Mexico - While Colombia’s President Alvaro Uribe has effectively won his country’s war against the drug cartels, the same can’t be said of Mexico’s President Felipe Calderon. The security situation there has worsened and is almost certain to deteriorate further over the course of 2009. Well armed and well financed narco-criminals have effectively declared war on the state of Mexico—increasingly singling out elected government officials, bureaucrats, and the armed forces and police for their attacks. As the government continues to rely on the military to go after the drug lords, the bloodshed will continue.

8. Ukraine - As I mentioned, Ukraine isn’t likely to spur the kind of direct military conflict we saw last August in Georgia. But it merits a slot in our top risks because of the government’s inability to deal effectively with the severe challenges posed by the current financial crisis and economic downturn—and one certainly not helped by its volatile relationship with Moscow.

9. Turkey - Speaking of internal distractions, Turkey is essentially defining the problem. The country has all sorts of factors in its favor—a diversified economy, strong demographics, an extremely favorable trade route geography, and solid ties with both western countries and its Middle Eastern neighbors. Yet the fight pitting secularists in the judiciary, military, and industry against Islamists in government is becoming a serious obstacle to economic advancement. And the AK party leadership, feeling that it increasingly carries the weight of popular support on its side, is unwilling to compromise—instead, casting out potential dissent from within the party (and losing critical bureaucratic competence as a result). To make matters worse, the AK party has long lost its reformist spirit and has embraced a more nationalist attitude, making it more difficult to find a solution to the thorny Kurdish question.

10. South Africa - Rounding out the top risks for 2009 is South Africa. Upcoming elections will dominate the news, but it’s more political context than electoral results that will cause concern. It’s pretty clear that the African National Congress (ANC) will keep its majority in parliament, though the emergence of a new splinter party will reduce its numbers. In principal, that’s not a bad development; popular concerns over the ANC’s abuse of power should be reduced accordingly. But the transition is going to be hard on the ANC leadership—with South Africa’s legislators having to accept the need to cooperate with political opponents, rather than using political influence to force would-be dissidents into line. The initial reaction is likely to be a lack of patience and tolerance, undermining public confidence in South Africa’s political institutions...and providing little comfort to investors.

Notice China instability, the Persian Gulf, and climate change are not on the list. Ian sees these as either red herrings or, in climate change's case, longer term developments.

Memories of Claiborne Pell, Nov. 22, 1918 – Jan. 1, 2009

The life of U.S. Senator Claiborne Pell was remembered and honored this morning at Trinity Episcopal Church in Newport, Rhode Island. Bill Clinton, Joe Biden, Ted Kennedy, and others eulogized this man's exceptional life.



Senator Pell was one of the greatest men I have ever had the honor of knowing. I first met the Senator through my mother who was his scheduler for the better part of her career on Capitol Hill. Every evening at dinner, through my mother's story telling, my family would learn about the way the Senator would handle gracefully the dramas and stresses of American politics. Over the years, Senator Pell took the place in my mind of a hero, a rare thing for Americans to have--even rarer for the hero to be in politics.

But that is one of the things that made Senator Pell so unique. It was his humility that set him apart from the rest. Rhode Island being my home state, I imagined Senator Pell gently showing the world why our state was "the biggest little state in the union." He did so by speaking softly while accomplishing great deeds: He was Chairman of the Senate Foreign Relations Committee; he advocated for the UN Law of the Sea; and he established the Pell Grants, which helped millions of students.

When I applied to attend the graduate program at Johns Hopkins SAIS, one of the requirements was to write an essay about a hero. That was easy for me. I wrote about Senator Pell's style of politics, building consensus across party lines. Senator Pell conducted politics with the mind that policy is the art of the possible. His leadership stood out particularly in contrast with so many others on the Hill who thought politics was a blood sport. I am happy that Senator Pell got to see Barack Obama elected as President as Obama seems to approach politics the way Senator Pell did--with integrity and respect for his fellow people.

During my first semester at SAIS (fall 1997), Senator Pell needed someone to watch over his home in Washington, D.C. while he traveled or was in Newport. I was more than happy to help. So while I worked at the library and attended classes in Dupont Circle, I would ride my bicycle back to the Senator's stately mansion in Georgetown every night to be greeted by the suits of armor on the staircase on my way up to my room. As a student with few resources, I felt I was living a double life and that somehow the Senator's wisdom about international treaties or law of the sea would seep into my head when it was exam time.

During the weekends that semester when I was not in at the SAIS library, I would read the hundreds of textbooks from Carl von Clausewitz to Paul Krugman, in Senator Pell's grand red living room, which housed the Senator's favorite red leather chair. Sometimes the Senator would visit the home and to my embarrassment, he would walk by while I was in his chair. I would leap up to offer the chair. But he would only wave, perhaps make a joke, and say, "Great choice (in chairs)."

As Pres. Clinton said this morning, Senator Pell was right to the end and there was something magical about him. Senator Pell even left us magically, passing away a few minutes after midnight on New Year's Day. The ripples from his life will continue on forever.