Morality & the Market: Towards a Value-based Economy, Peter Ester 

Bijdrage aan het eerste ECPF European Congress, “Values, foundations forEurope’s economy”

Brussels, 7 June 2012, European Parliament, Altiero Spinelli, A5E-2

The moral dimension of the financial crisis

Gordon Gekko, the main fictional character in Oliver Stone’s celebrated movie Wall Street - played by Michael Douglas – became legendary by his famous statement that “greed is good”. Gekko, a scrupulous corporate raider in the world of finance, later became a symbol in popular culture for unrestrained greed. An embodiment of everything that went wrong with Wall Street capitalism. "Greed is good," he pronounces at one shareholders' meeting. "Greed is right. Greed works, greed clarifies and captures the evolutionary spirit."

The present financial crisis shows that the greed-is-good ideology has not been tamed: Gordon Gekko is alive and kicking. We are the children of Gordon Gekko as former Australian Prime Minister Kevin Rudd stated.[1] The sub-prime crisis, the housing bubble, the global credit boom, the dramatic stock market events, the extremely high-risk financial products, mirror a culture of greed that had a worldwide devastating impact. The culture of greed reached a dubious highpoint in the abject pre-crisis CEO bonus culture. Angelo Mozilo, CEO of sub-prime lender Countrywide Financial, made more than $ 470 million between 2001 and 2007 shortly before its collapse. Stanly O’Neal, former CEO of Merrill Lynch was paid $ 100 million as a result of the huge bank profits on the housing bubble; late 2007 Merrill Lynch announced losses of $8 billion because of the sub-prime crisis.

I will argue in this presentation that this culture of greed signifies that the present crisis is not only a financial crisis, but also a moral crisis. Markets and morality have become decoupled domains that no longer overlap.[2] They are detached modalities. Markets are based on perverse financial incentives and the self-cleansing moral power of the financial markets is close to zero. Markets hold morality hostage, instead of the other way around.

Let me emphasize that for me a greedy economy is more than CEO’s chasing for excessive bonuses. For me a greedy economy stands for a market system that intentionally prioritizes short term economic profits over long term negative societal consequences, that favors materialistic goals over postmaterialist concerns, that excludes ecological reasoning from its economic calculus, and that rules out the interests of the next generation. A greedy economic culture stands for immediate gratification, for the hedonistic glorification of the here and now, for the neglect of more enduring economic demands.

My main conclusion in this paper is that we need to fundamentally redefine the relationship between morality and the market. We must stop the corporate culture of greed and must build a corporate culture of sustainability and long-term performance. It is all about basic values: the values of Gordon Gekko (“greed is good”) against values that stress sharing, responsibility, and stewardship. In the end - or maybe better in the beginning - this is the real clash of values. And as I will argue, it is at his point of basic human values in the economic domain that Christian political parties should make the difference.

The European condition

These are frightening times. The Euro crisis hit hard. Unemployment is rising rapidly. Youth unemployment in particular is reaching levels that are beyond ordinary concern. In Greece and Spain half of the young people are without a job; in Italy youth unemployment is 30%, in Portugal 35%, and in France 25%. Roughly one out of five young Europeans is unemployed.[3] If the crisis would continue for a substantial number of years, the danger of a “lost generation” becomes plausible. The intellectual discourse about a “risk society” becomes a harsh reality.[4] And we are hardly prepared, so it seems. Our financial system is extremely fragile, vulnerable, and not crisis-proof. Stock markets go up and down as yo-yo’s and there seems no relationship between economic performance and share prices. Between the real economy and the stock exchange value. Psychology – the intangible rhythm of rumors and speculations - has become the dominant factor in the economic carousel. The financial system lacks healthy rationality.[5]

This psychological rhythm determines by the hour how our financial-economic system fares. The day that former Greek prime-minister Papandreou stated that Greece would held a referendum on the EU aid program for his country, a billion Euro evaporated at the financial markets. The rationality underlying our financial system is increasingly hard to explain and lacks sustainability and stress immunity. It has become far too complex and non-transparent. And exactly at these points lies the basic problem. It is the detachment of the financial system from the real economy that brings us in trouble. The present crisis shows that it is the financial markets that traps the political domain and forces it to reactive action. But how do we regain the political mandate? A general principle is that we have to sharply decrease debts, both of countries and of citizens. Debt research shows that the great global credit bubble had an unprecedented impact both on families, businesses, financial institutions, and governments.[6] It is highly significant that the number “million” lost its quantitative meaning; “billion” is now the main monetary debt marker. Total national debts as a percentage of bbp runs between 300 and 500 % for several European countries.[7] Similarly, government debts in 2010 in, for instance, Portugal, Belgium, Italy, and Greece ranged between 90 and 150% of their bbp. The permanent ESM debt volume is tentatively set at 500 billion Euro. These are figures far beyond imagination. It illustrates that things have got out of hand. The combination of the decrease in interest rates in the period after 1981 (and especially after 1995) and the tax deduction of interest payments is an important explanation for the explosive growth of the private equity system.[8] Private equity firms are per definition not long term shareholders: they sell their acquisitions in order to make new investments. The former German vice-chancellor and SPD chairman Franz Müntefering compared the leveraged buy outs of private equity firms with grasshoppers who eat the economy bare. The banking crisis revealed the pressing issue of what economists call “moral hazard”: the tendency to take undue risks because the consequences are not borne by the actor taking the risk. This explains the limited equity capital of banks and the high leverage factor in this sector. Banks simply had too much debts and too little solvency. And the same is true for consumers. The largest debts increases in the last quarter century were observed among banks and households.

The spiral of debt affects us all. There is no economy of unsettled bills. We simply live beyond our means. And if we do not fundamentally reorganize our financial system, the next generation will have to pay for these bills. In my view this is an unacceptable violation of the very Christian notion of intergenerational solidarity. The financial crisis generates great uncertainty, fear, and also cynicism. The citizen looks at the financial inferno with despair and unbelief. Many fear for their future. Trust, essential precondition for a healthy economy, seems a virtue from a far past. It is not an imaginary danger that we leave a world that is worse than we came across. Our financial system, so the conclusion holds, is not sustainable. The system is not based on a set of healthy values.

The Dutch mortgage system illustrates the irrationality of our financial system. The Netherlands ranks among the countries with the highest private debt ratio. A growing part of the population even has a negative net worth. Against a GDP of about 600 billion Euro, Dutch people have an accumulated mortgage debt of 644 billion Euro. Mortgage debt has quadrupled since 1996. The main reason for this immense private debt ratio is that the Dutch tax system enables generous deduction of mortgage interest. This system facilitates private homeownership but it also maximizes mortgage debt. The banking sector “excelled” in creating mortgage products that stretched the tax degrees of freedom but that also created mega consumer debt. Moreover, the mortgage tax reduction system had an enormous upward impact on house prices which blocks the housing market entry of younger people. Prices are artificially high, much higher than in neighboring countries. The present housing crisis led to a substantial number of consumers who face seriously difficulty in paying their mortgage interest. The system especially affects consumers under 35 years of age. Their liquid buffers are limited and they are often faced with a negative surplus value of their houses.[9] As a consequence the financial situation of young home owners is vulnerable and becoming unemployed could generate serious scarring effects.

The Dutch housing crisis clearly illustrates that a tax system that encourages the maximizing of interest-only mortgages and the minimizing of principal mortgage payments leads to a devastating individual rationality. It reinforces making debts and it makes paying your debts financially unattractive. “Live now, pay later” is the leading axiom. It puts a premium on household investing behavior that has a very destructive logic. A logic that is far from being congruent with simple Christian principles of saving before you buy and paying your debts. It resulted in a culture of consumer greed – supported by the official tax system – which made the Netherlands world champion debt. Fortunately, recent political developments show that this abject system of mortgage financing meets with severe criticism. I am glad to say that my party – the Christian Union – played a crucial role in this debate.

Christian values and entrepreneurship

A value-based European economy starts with – or at least presupposes – value-based entrepreneurship. We need Christian entrepreneurs that are inspired by social consciousness, ecological concerns, and global justice. We need entrepreneurs who are not solely driven by short-term profits and short-term returns on investments. We need entrepreneurs who take the broader picture into perspective, who are value-driven. Entrepreneurs that are not obsessed by quick wins. We need entrepreneurs who want their business to make a difference in their community, who set the stage in the world of commerce form a sustainable point of view. Businesses that make products, create services, or design technologies that make markets, communities, and consumers stronger. Businesses that leave a social footprint in the world. Businesses, in short, you want to work for.

Value-based entrepreneurship and profitability are not mutually excluding phenomena. This would be a very false inference. Founding an innovative company on elementary social values and ecological principles can be very profitable, also from a classic business point of view. Let me illustrate this important notion. For my latest book, Faith, Family & Fortune (2012), I interviewed more than twenty highly successful American Christian entrepreneurs, some of whom lead companies with annual sales of several billion dollars.[10] Some of these companies figure prominently in ranking lists of America’s most successful enterprises. These outstanding entrepreneurs founded a number of remarkably vibrant and flourishing companies. They all share a Christian – i.e. a conservative Christian – outlook on life, are active members of their churches, and play a leading and visible role in their communities. They are champions of philanthropy and take the right balance between their private interest and the common good very seriously. They donate substantial sums of money to hospitals, museums, schools, colleges and universities, education grants, disabled groups, nature conservation, environmental projects, urban revitalization, performing arts, and numerous other causes. American Christian CEOs give, and they give profusely. Through their charities and foundations they contribute many, many millions of dollars. Enlightened self-interest is surely an important explanation but particularly in the Christian version: tithing.[11] Many of the outstandingly successful entrepreneurs I interviewed mentioned that tithing—giving one-tenth of one’s earnings as a voluntary contribution to church - is a rule that was observed in their youth by their parents.[12] It was a moral obligation to give and to share. And they follow this obligation. As one entrepreneur said: “There is no joy in having money. There’s only joy in giving money”. Not to reinvest a substantial part of your profits in the community is not an option. These successful Christian entrepreneurs are all ardent supporters of free enterprise and free market but include wider social goals and moral values in their business models.                                                                                                                                                    

This moral obligation to give and share is a truly amazing feature of American entrepreneurial culture, as Alexis de Tocqueville already noted almost two centuries ago.[13]  It is significant to observe that my group of highly successful Christian entrepreneurs explicitly states that their success was reinforced by simple Christian values that they were brought up with: commitment, hard work, persistence, focus, talent development, responsibility, accountability, honesty, fairness, saving, discipline, preparation, trust, and structure. These basic values, norms, and moral standards served them well in their career. Their entrepreneurship greatly benefited from the Christian credo and from Christian ethics. Simple but effective values and principles.

A major difference between American and European entrepreneurial culture is that American Christian entrepreneurs are much more open about the way their personal faith influences their business activities compared to their European colleagues. American entrepreneurs are quite comfortable with publicly speaking about their faith; European entrepreneurs are more hesitating in this respect. American Christian entrepreneurs externalize the role of religion in their life; European Christian entrepreneurs, so it seems, internalize this role by keeping their faith to themselves. Undoubtedly, these different ways of expressing one’s religious beliefs and values have to do with the distinctive position of religion in the public and private sphere in America and Europe.[14] But it would be a great step forward if European Christian entrepreneurs would more openly communicate about the way their faith shapes their entrepreneurial values, and by the way their Christian values relate to their business models. It would be very inspiring if they would publicly communicate how their entrepreneurial mission is rooted in their Christian beliefs and ethics, also in terms of their company’s economic, social, and environmental values. In this respect European Christian entrepreneurs can learn from their counterparts at the other side of the ocean.

The way out: Back to basics

I believe that Christian economic thinking should reinvent itself by going back to its fundamentals and by bringing in essential values in the economic and financial domain.

Values such as simplicity, moderation, solidarity, sharing, fairness, stewardship, work ethic, responsibility, saving before you buy, paying your debts. Values we were raised by and values that we teach our children. Basing the economy on these simple but crucial values - which are at the heart of the Christian social tradition – must give a necessary boost in reshaping the dominant economic paradigm. Our economic and financial institutions should both mirror and guard these principles. If there is one lesson we can learn from the present financial crisis, it is that we desperately need an economic system that is founded on sound principles of sustainability, of community, of transparency, and of integrity. A relational economy that is built on mutual trust, appreciation, and care. A system that takes a long term perspective on production and consumption choices, that sets limits, and that takes the needs of future generations seriously. We require economic, financial, and fiscal policies that are rooted in these well-tried basic values. It will lead to an economic system that is more balanced, more healthy, more sustainable, and that reflects intergenerational equality.

Above all, we need innovative entrepreneurs who show that basing business on these essential values works. Entrepreneurs who show that value-based companies can be highly successful, also in terms of profitability. We need new business models that take a wider responsibility horizon, and that are firmly rooted in the community. Business models that become role models. Some very persuasive examples were presented earlier this afternoon. We need successful Christian entrepreneurs to speak freely and convincingly about the way their faith shapes their business model and its underlying values. We urge Christian entrepreneurs to speak up as a community, to set the agenda for value-based entrepreneurship, and to re-couple morality and the market.

Conclusions

Dear friends, let me share my main conclusions with you. What Europe and European countries need is a fundamental shift in economic values. The very inspiring presentations we heard during our conference today made painfully clear that the prevailing economic and financial system lacks a basic sense of guiding ethical principles. We have to bring back morality in the market. The financial crisis is also a moral crisis. Our economy needs – to paraphrase Max Weber – a redesign of the balance between Christian ethics and the spirit of capitalism. We have to transform capitalism into an economic paradigm where values matter. We must break with an economy that reinforces consumerism, hedonism, waste, quick wins, and lifestyle extravaganza. We need a new set of minima moralia. We must break with a financial logic that favors greed, extreme risk taking, unrealistic optimism, and monetary fixation. We want bankers to be respectable actors again who take their civic role in the community. If we do not succeed in reconnecting morality and the market, the market economy will penetrate and rule the social and cultural domain as well. The dominance of market values will lead as Harvard political philosopher Michael Sandel convincingly argued, into to a market society.[15] A society in which everything is measured in money. A society in which everything is a commodity, in which everything is for sale. The logic of buying and selling, according to Sandel, no longer applies to material goods alone; it governs the whole of life.[16]

I am convinced that a realignment of morality and the market, of community and capitalism, of ethics and entrepreneurship, is the way to go. The Christian social tradition can make a vital difference in this respect. But we have to practice what we preach. And we have to preach what we practice. We need morality in the market. I believe that our churches and Christian political parties ought to take the lead in re-calibrating the debate on the moral roots of the present crisis in Europe.

I am glad to see that this focal issue constitutes a top priority on the agenda of the European Christian Political Foundation. Reconnecting morality and the market is not an option, it is a survival strategy. It is not a regression to moral nostalgia, but a reprogramming of our economic ethic software.  It is a paradigm shift. We need to go back to basics.

Thank you.