Self-interest and Common Good in America of the 21st Century
by: Surendra K. Kaushik
The Great Recession of 2007-2009 is fundamentally blamed on the utility (greed) maximization behavior of financial leaders in banking, investment banking, securities industries, insurance and wealth management activities. It is this super rich group that “earned” much of the 23.5 percent of income going to 1 percent of the population in America in 2007. The government, business and investors remembered only the pleasure and not the pain side of Jeremy Bentham’s utilitarian philosophy (1780) and its liberalizing practice. Since there is no saturation point on the individual and enterprise utility path, when does the pleasure principle reach a point of negative return for the group pursuing pleasure of earning millions and billions more dollars? When did such a point reach? Did it reach before or after the fall of Bear Stearns, and subsequently Lehman Brothers? What can be done to stay on the pleasure (positive) side of the utility for the whole society in the future? The GDP growth following the recession of 1980-81 and the liberalization of financial laws, regulations, institutional oversight, and the general acceptance of philosophical foundations of utilitarianism in Reagan, Bush, Clinton, and Bush administrations from 1982 to 2008 gave a false sense of continuing ascendance of the aggregate utility curve. Even independent agencies like the Fed cheered on while invoking irrational exuberance. The result was, as we now know, a great pyramiding of risk by the major financial players spreading a wider net to the global saver-investor. Perhaps the tipping point of aggregate pleasure and pain was reached when (i) American banks were allowed to become universal banks when the distinction between commercial and investment bank was abolished (ii) the derivatives were not required to keep any reserves for the rainy day (iii) banks could give out sub-prime mortgages without income verification (iv) and insurance companies could write policies that they thought would never be claimed and they could invest the entire premium in high return assets. Unfortunately trillions of dollars of income is lost, millions are homeless, workless and in pain, billionaires have become mere millionaires or less. Because a small number earned very high incomes inequality is at a point where some two-thirds of the increase in income has gone only to 1 percent of the population in recent years. Financial reforms such as adequate capital requirements, measurement and management of risk, protection of consumers and debtors, real truth-in-lending and borrowing, compensation limits to stay on the pleasure side of risk on the part of financial managers would possibly prevent future crises. But they will also limit income growth. Societal pain-minimizing measures such as mortgage refinancing to avoid foreclosures and growing homelessness, stimulus packages to create jobs and income both in the public and private sectors, and availability of universal health care would create more equality in the quality of life. The proposed reforms recognize that the utilitarian liberalization had swung too far on the side which assumed that more risk taking would always bring reward and pleasure and not loss and pain. One possible way to resolve the extreme distribution of income on the one hand and the budget deficit of the federal government on the other is to not tax the rich more (currently thought to be anyone above $250,000 of annual income) but to require the rich to give back all except a reasonable portion a rich person needs for himself/herself and his/her family, to community investment in education, health, nonprofit service organizations, entrepreneurship incubators, schools, colleges, educating, feeding and housing the poor and lower income in America and other worthy causes around the globe. This follows the great examples of Andrew Carnegie, Warren Buffett, Bill and Melinda Gates, the Ford family, the Rockefeller family, etc. This way we keep the self-interest working in a positive way, like Warren Buffet continues to maximize income, learned from childhood to MBA at Columbia, but then donates it back to society and take the tax-deduction as well which avoids the necessity but possibly negative consequences of high tax rates on the successful and rich. Self-interest as the driving force in a market economy foresaw the need for good governance and morals of market participants otherwise they would tend to collude and monopolize in the analysis of Adam Smith (1776). If competition was not adequate the government had to see to it that self-interest did not turn into greed. Clearly the government failed in managing the societal pleasure-pain trade-off by allowing self-interest to become greed of the smartest and the most knowledgeable in finance, management, accounting and auditing, and in statistics and mathematics as applied to economic and financial models and forecasting. Is there the capacity and willingness to take on the task of figuring out the tipping point of societal pleasure and pain continuum? Do we know enough to reset economic behavior of benefiting from self-interest without destroying the economic system all over again?
It would be far more desirable to keep the income and wealth maximization as a goal with incentives like lowest possible tax on all incomes, albeit at graduated rates, and then to give further incentive of tax-deductibility to donate an increasing percentage beyond a taxable income of, say, $500,000. For example, require giving away 20 percent from $500,000 to $1 million, 30 percent from $1 to $2 million, 40 percent from $2 to $5 million, 50 percent from $5 to 10 million, 60 percent from $10 to 20 million, and 70 percent from $20 million and above of annual taxable income. Donors will continue to give to the community cause of their choice within the federal tax system. Those who decide not to give would be taxed at the proposed rates.
The main idea is to maximize production of income in society and then use it fairly through private, community, and government spending. This may solve the recurring problem of super success of capitalism followed great unequal distribution of income and wealth in turn followed by revolutions, violent or peaceful, through history so accurately analyzed and predicted by Karl Marx including the latest example of the financial crisis of 2007-2008 and the resulting Great Recession of 2007-…
Warren Buffett and Bill Gates should not only round up the rich to give but impress the public and the Congress to create laws to institutionalize this new system of income and wealth distribution while preserving the unfettered pursuit of income, wealth and pleasure.
Surendra Kaushik is a professor of finance in the Lubin School of Business of Pace University in New York and Westchester.
