Magazine

Commentary: A New Economy Needs a New Morality


By Michael J. Mandel

Each economic era has its characteristic moral struggle. For most of the past 50 years, the moral and political debate in capitalist economies focused on the tug-of-war between income equity and economic efficiency. Liberals argued that it was a moral duty for society to extend a helping hand to those less fortunate--the poor, the unemployed, the less-skilled, the elderly. Conservatives, by contrast, held that boosting productivity, efficiency, and output was commendable and socially virtuous. Together, these two imperatives formed the moral foundations of the post-World War II American capitalist economy.

Equity and efficiency are still important today. But the fall of Enron Corp. does not fit neatly into the efficiency-equity debate--and neither do the other big economic and financial disasters of recent years, such as the accounting scandals, the dot-com crash, and the telecom meltdown. Despite all efforts of Democrats to put a populist spin on these crises, they have not resulted in massive spasms of unemployment that hurt the poor and widened income distribution. Instead, it has been the Investor Class that has absorbed much of the pain. Nor, to the chagrin of Republicans, can the problems be attributed to government overregulation that hurt efficiency. Rather, they were arguably the result of a lack of oversight.

The moral outrage today focuses on risk. Basically, investors and workers are incensed at being snookered into taking risks they didn't understand and wouldn't have willingly accepted. Enron lied to shareholders and workers about the risks they faced. Venture capitalists brought high-risk startups public without clearly informing investors of the dangers. And more broadly, greedy executives and financiers have been shifting risk to other people without their informed consent, undermining their security.

This is still an equity and fairness issue, but it's a much different sort than in the past. Compared with the Old Economy, the New Economy is based far more on risk-taking. Financial markets are much more central, venture capital and startups more important, and stock options more pervasive. Continued technological and market innovation is essential.

But there's a moral vacuum at the heart of the New Economy that needs to be filled. A clear consensus hasn't yet formed about the dividing lines between acceptable and unacceptable risk. People want to be able to take risks--invest in the next hot stock, join the next hot company. But they want to be able to decide, knowledgeably, how much risk to take.

Here are some principles that are a beginning of a moral framework for the New Economy:

Voluntary risk-taking in the pursuit of innovation and growth is both desirable and commendable.

Entrepreneurs, aggressive investors, and risk-taking workers are to be celebrated for their contributions to growth. Business journalists were right to pay lots of attention to people like Jeffrey P. Bezos, the founder of Amazon.com Inc. (AMZN), because he exemplifies a willingness to take the sort of risks that move the U.S. economy forward, benefiting future generations and the rest of the world.

But encouraging risk-taking is only half of the equation. The other half is keeping it under control--and that's where the real mistakes were made.

Transparency is an essential virtue.

The rules of accounting have always endeavored, at least theoretically, to promote disclosure. But in the New Economy, transparency becomes a broad moral imperative. Innovation is difficult enough without the true risks being obfuscated and hidden. Thus, Enron's shareholders were cheated because they did not receive full information about the true debt and profits of the company. And while most venture capitalists did nothing illegal when they made big bucks by selling risky dot-com and telecom startup shares to small investors, they did commit a moral wrong.

Imposing risk on others without their informed consent is morally problematic.

In business and technology, uncertainty is unavoidable. But pushing risk on to others without their consent is a bit like dumping garbage on other people's property in the middle of the night. Forcing employees to hold excessive amounts of company stock in their 401(k) accounts, for example, imposes unnecessary risks on people. Similarly, a company that offers only health-care plans with high deductibles to workers as a way of lessening its own financial risk may be stepping over the line.

This sort of risk-shifting, in which workers, shareholders, and consumers are forced involuntarily to bear undue risk, is not acceptable. Imposing nonconsensual risk is in some ways like stealing: On average, it makes the people absorbing the risk worse off.

Richer people, organizations, and countries should be encouraged to take on a larger share of the risk.

The concept of charity, in the sense of giving of money, is a familiar one. But it's an equally important moral imperative for the riskiest projects and activities to be taken on by those best able to bear the uncertainty, while poorer people should have more income and job security. Wealthy corporations have a responsibility to fund risky innovations even if it doesn't immediately help the bottom line. Rich countries such as the U.S. are morally bound to make investments in the developing world even if the risks are high.

It should be noted that encouraging the rich to take more risks could well widen the income gap, because, typically, higher-risk investments have bigger payoffs. For example, the U.S., with big investments in startups and cutting-edge technologies, took more risks than other countries in the 1990s and was rewarded with faster growth. That widened the gap between the U.S. and other countries.

Moral principles do not immediately translate into policy. The appropriate balance between equity and efficiency has been the focus of political debate for decades. Similarly, the fight over how to regulate risk and security is only now starting, as Congress considers reforming pension plans, 401(k)s, Social Security, and disclosure requirements. But no matter what laws are eventually passed, moral foundations are critical to reassure jittery investors and workers, and to put the New Economy on a firm footing. Mandel is chief economist.


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