189. "Good Ethics Is Good Business - Really" The New York Times, (February 12, 1989). Also published in German as "Der Markt Determiniert Die Ethik?" gdi impuls, (April 1989), pp. 56-58. Also published as "The Culture of the Pits as it Affects the Market" San Francisco Banner Daily Journal, (May 5, 1989).
As scandals mount in the financial and commodities markets, economists theorize that the market determines one’s ethicality. If “everybody” cheats, those who don’t’ will be wiped out. Like much economic writing, this conclusion is not based on factual observations of ethical traders who went bankrupt, but on abstract theories about “perfect competition.”
University of Chicago sociologist Wayne Baker observed that many traders in the pits organize themselves in tight-knit social groups that jealously guard their pits. Often, they do not “hear” better bids shouted by traders who visit from other pits. And they juggle trades to exhaust the capital of those outsiders. More generally, social scientists have found that social ties and other such non-economic factors largely determine whether conduct is ethical. Leading these non-economic factors are local cultures and the social webs that sustain them.
For example, the culture of some pits is more tolerant of unethical conduct than the culture of others. Federal Bureau of Investigation agents initially penetrated the Standard & Poor’s 500 pit but found little unethical behavior. The agents then moved into the yen and Swiss franc pits, which reportedly have much more lax cultures.
Other differences in culture and regulatory traditions seem to exist among exchanges. In previous years, many investors, believed that the New York Stock Exchange adhered to stricter standards than the American Stock Exchange and over-the-counter market, which in turn were thought of as “cleaner” than certain regional exchanges. (Denver’s exchange, for example, is often in the news as the hotbed of often manipulated penny stocks.) Likewise, the Tokyo and Mexico exchanges are believed to be much more “rigged” than, say, the exchanges in London.
Cultures are introduced into behavior by what sociologists call “differential association” - if you join a corrupt organization, pretty soon you are likely to behave accordingly, unless you are one of the very rare people who quit. A study of price fixing in the electrical equipment industry found that “the defendants almost invariably testified that they came new to a job, found price fixing an established way of life, and simply entered into it as they did into other aspects of their job.”
The national moral climate is an important factor that pushes local cultures in one direction or another. Sally S. Simpson, who studied anti-trust violations between 1927 and 1981, found such violations were more common during Republican than Democratic administrations.
Another economic theorem is that unethical behavior rises in a profit squeeze. To survive trades, financiers and others are pushed, if not forced, to “cut corners.” Or, as it is often put, ethical behavior is a “luxury” of those with hefty profit margins. Actually, the implication that ethics is bad for business is simplistic. As the commodities markets already discovered, unethical behavior tarnishes an industry’s reputation and drives out customers. It is an effect that lingers for years.
Also, transaction costs are higher the more unethical the market. The less that those who trade can trust one another, the greater is the need for inspectors, lawyers, and regulatory agencies. The current F.B.I. commodity market investigation was reportedly set off after a major agricultural company, Archer Midland Daniels, complained that the cheating in commodities was hurting its business. We tend to forget that the commodity exchanges not only serve those trying to make a fast buck, but also smooth out agriculture and exports.
Finally, any examination of the list of people charged with insider trading suggests that they hardly suffered from a profit squeeze. Most are multimillionaires - the stretch limo crew. Unethical behavior is in large part driven by lack of conscience, unbridled greed, desire to “outperform” the other guy in a game scored in millions of dollars. Others, on the way up, become so accustomed to “cutting corners” and acquire so much hubris in ducking the law, that they fail to change even after they reach the top. Moreover, in each trade and profession, and on all levels of income, there are many who are basically honest.
The cultural and organizational foundations of unethical behavior inform us where the corrections must be made. National leaders, especially the President, can set higher standards. Self- regulation is inadequate. Individuals who are ethically concerned need to join with like-minded others to participate in the difficult task of changing unduly lax cultures. They will often lose business to other markets if they do not shape up. They will always be less able to face their neighbors, community and children, and one hopes, the better self.