Pari Roundtable on Corporate Ethics, Globalization and Economic Instabilities

November 16, 17, 2002.
Background paper.

Participants
Dr Virginia Del Re, Pisa, Italy
Prof Warwick Fox, UK
Prof Maurizio Franzini Rome, Italy
Siraj Izhar, UK
Dr Elena Liotta, Orvieto, Italy
Professor Roy McWeeney, Pisa, Italy
Neil Maroni, UK
Professor Edward Nell, USA
Dr F. David Peat, Pari, Italy
Dr Francesco Rinaldi, Siena, Italy
Narendra Sakharam Gaonkar, Grosseto, Italy
Prof Gianni Tibaldi, San Gimignano, Italy
Prof Alessandro Vercelli, Siena, Italy

The Pari Center for New Learning would like to thank Centromarca and Banca Monte dei Paschi whose financial support made the meeting possible. Before the meeting participants’ papers were posted on the website as well as being made available in print during the meeting itself. The two days were structured as a roundtable without papers being formally presented. Instead participants raised issues regarding ethics and globalization which were then discussed and debated by the whole group. For this reason it is at times difficult to point to the ‘ownership’ of a particular idea. Discussion took place not only during the sessions but also over lunch and dinner.

Corporate Ethics

The meeting began with a discussion of ethics. Ernesto Illy pointed out that the invisible pillars on which Adam Smith’s concept of the market had been founded were honesty, trust and respect. Such moral stance has become eroded in the modern world. Indeed the present instability of the market is the direct result of the accounting scandals associated with Enron and Arthur Anderson—companies that had not adhered to transparent ethical principles. For Illy the image of a company was less important than its reputation and the history of its behavior.

But how are ethics to be founded? In every situation there is an actor, an action and a consequence. Different philosophers have placed their focus on one or other of these three stages respectively; judging morality by the codes of a righteous person, by their behavior or by the consequence of their actions. In the ancient world the origin of the first approach can be found in myths, taboos and religious strictures. Philosophers had also created their own systems. Both the Vedic writings and Platonism viewed ethics as somehow inherent in the very structure of the universe. They were a code of conduct that could be learned as a sort of knowledge by the wise. For Kant ethical behavior should be viewed as a duty and when that duty was not obeyed people should be punished. Others, such as Hobbes, suggested that morality emerged as individuals came together to create societies for mutual protection. In other words, they were a basis on which functioning societies could be built. In both cases ethical philosophy recommended codes and duties as being the basis for right living and right action. The Utilitarians however adopted a different tack and focused on outcomes—the greatest happiness for the greatest number. But how are small benefits to a large number to be weighed against disadvantages to a small minority? Nevertheless, such a philosophy, often unconscious and unexamined, stands at the basis of much economic theory.

Illy agreed that corporations and the market must be founded on firm ethical principles yet in today’s globalized world where is one to find a universal set of moral principles? Illy suggested that science is the only system with sufficient credibility and that by looking at natural systems one could uncover rules and pattern of behavior that could also apply to the marketplace. It is not difficult to discover such underlying patterns of behavior—successful ecologies, for example, support diversity and competition¸ redundancy makes them robust, feedback loops can be used to stabilize and amplify; rich interlocking cycles allow energy to move through the systems being transformed and used in multiple ways. Moreover, all players must in some way feed back to support the overall ecology in which they exist.

Warwick Fox, however, pointed out that while science may tell us how the world works as well as providing powerful metaphors and descriptions, it is a different methodology from ethics. Or, to return to Hume, there is a logical gap between what ‘is’ and what one ‘ought’ to do. Fox suggested that we should look at a three-tiered approach to ethics. At one level there is the artificial environment in which we live with our personal ethics, at another is social or corporate domain. But both of these are embedded in something far greater—the entire biological or ecological system of the earth. If there is a moral imperative, it should be the survival of this vast ecosystem of the living planet. Codes of behavior should originate at this level. People are now speaking of the sixth wave of extinction—the last being the age of the dinosaurs, in which an enormous number of species is becoming extinct in a short-time scale.

Ethical decisions can be taken at the personal, public, corporate and national levels. Normally governments exert control over what citizens and corporations are allowed to do, but what happens when this is out of balance and corporations are too big? One should perhaps set corporate ethics within the larger framework of social ethics and social ethics within the biosphere. What is the bottom line? It is the survival of life on earth. Ethical principles can take that as an overarching theme.

Fox also suggested that long-term survival will give rise to moral rules while, in the short-term, other rules can evolve. So there may be two levels of moral rules.

A particular issue that was addressed was the long Western tradition, since the time of the Greeks, of anthropocentric thought. This is echoed in the Judeo-Christian belief that plants, animals and the earth itself are placed here for human use. Along with this is the belief that is even persistent in secular humanism, that the human race has somehow reached the pinnacle of evolution. Even Kant’s proscription on cruelty to animals was based on the argument that if one is cruel to animals one may end up being cruel to other people. Clearly attitudes to animal life and ecologies is changing and corporations must take this into account.

But how are these rules to be enforced? Do we look for the creation and implementation of these rules as being the responsibility of some definitive international organization such as the United Nations i.e. a sort of global superego that seeks to control our individual and corporate behaviors? Or will it evolve in an organic way as a series of individual international accords and agreements in certain areas—i.e. restriction of cod fishing, EC refusal to have cosmetics tested on animals, accords on greenhouse gas emission and so on. Taken together these would provide a series of global checks on certain kinds of behavior. As Ernesto Illy pointed out for practical reasons it is far better to have a moral code of ‘Don’ts’ rather than ‘Do’s.’ His own approach was to think of markets as having a frame. Within the picture actors are free to do what they like but their behavior must always be confined to within the frame.

Warwick Fox felt than in many cases corporations would be happy to adopt global rules for regulation of their behavior. He gave the example of the use of helmets in Canadian ice hockey. Players do not use them since they wish to maintain a macho image. However, in private they wish they were compelled by regulations to wear helmets for protection. Such a compulsory rule would be welcomed by all; likewise, there are many areas in which corporations would prefer to be restrained in their behavior, as this would lead to longer term benefits.

A further Canadian example concerns stamps given out with purchases by a particular chain of supermarkets. At one stroke all supermarkets had to follow the same practice. Company executives said while their public position would be to complain if the Government disallowed such stamps, in private they would be relieved not to be forced in the position of ‘follow the leader’ for non-price competition and would like some do’s and don’ts put into place so they could change their behavior.

Stag-flation

In the field of economics Ed Nell introduced the notion of stag-flation. Alessandro had seen free trade as advantageous. In such a system everyone works at what they can do best and all profit through a system of exchange. This worked well in the age of the traditional nation states. But what happens in a world in which nations are at a different stage of technological ability? The powerful penetrate the weaker nations and the latter develop balance of payments deficits. Since there is no world system to fund such deficits the poor nations find that they cannot pay. They are therefore forced to contract and to reduce their imports.

There must be a backup to support the weaker nations otherwise they will begin to stagnate. In a world of flexible exchange rates this means that stagnate nations have weaker currencies. This leads to speculation against the weak currencies whereby speculators make money at the expense of the economics of weak countries. The result is a rise in prices—inflation. Contractions get worse and worse to the point of economic crash or hyperinflation. The result is sustained stag-flation.

Weaker nations are importing technology from the richer. Prices go up but they still have to import. Labor must try to defend its standard of living and so a wage-price spiral begins.

This is a situation in which everyone is acting according to reasonable economic principles—governments, importers, speculators, banks, etc. Each party does the best it can but the mutual interactions into one system leads to contraction-inflation and instability.

The meeting asked what new kinds of creative institutions could exist. It pointed out that we are situated at the Center (the industrial world) with the Periphery being the Third World. This is an unacceptable, asymmetric situation. There must be ways to control these instabilities otherwise there will be systemic asymmetry.

Nell recalled the American revolutionary maxim ‘no taxation without representation’ and suggested that it should be converted into ‘no economic impact without representation.’ The Third World should be more strongly represented in those economic decisions that impact it.

Nell also proposed a solution to the phenomenon of stag-flation—the Employer of Last Resort. Agencies would be set up to employ people during periods of unemployment. In this way everyone would be guaranteed a job and the wage paid by the Employer of Last Resort would, in effect, be a minimum wage. In turn this will automatically fund non-profitable public needs. When the economy picks up, workers would then move to jobs in the private section. In this way there would be an automatic dampening effect on the oscillations of the economy. While such a system would only apply to advanced nations its stabilizing effect would then contribute markedly to the wellbeing of poorer nations.

Non-linear Markets

Nell pointed out that modern economics is about complex non-linear systems. However it is possible to separate out fast and slow variables. These latter variables, constrained by stronger market forces make it possible to treat the macroeconomic system as quasi deterministic in the short term, which allows for some measure of control, and cyclic in the long term. To some extent it is therefore possible to model how the economy works. But for such non-linear systems there will be multiple solutions, bifurcations, points and areas of uncertainty so that it is impossible to make long term predictions on the market’s future.

Nell also suggested an analysis of the market into a series of two levels and two sub levels.

Level 1 People understand what they are doing. These include corporations with strategies, regulators, and households. To this there are two sublevels

1. Overt or stated description of the system. Peoples’ understanding of what they are doing. Policy disclosure, newspaper reports and company statements
2. Covert, latent and hidden dimension. People have secret strategies, even self-deception. What is the relation between a and b?

Think of the war on drugs. Why was it perpetuated? It was probably motivated by level (b). One could speculate that it is to do with the war on poverty. This involves policing and community solidarity: i.e. all that is served well by the war on drugs.

Level 2. Systemic. How do all these agents interact together? This results in macroeconomics and complex non-linear connections. At this level we can get things that we anticipate.

Look at the paradox of thrift. Everyone wants to save, so they spend less, goods are cheaper, wages drop and people ending up saving less. It is when individual agents couple into the system that the unexpected can happen. People may intend to do a thing but when they act together it produces something different.

Level 2 must be understood if there is to be control: i.e. there are years of boom and bust. These could be controlled if the system could be understood and regulated.

Level 2 also has sublevels:

1. systemic, macroeconomic and global
2. super system, global economic interests that interact with the ecology. This can be modeled and we can examine the forms of interaction.

The ethical question at each of these levels will interact with the economic. What are the outcomes and how can we control them? What types of controls can we exert? What are the costs?

There seem to be two types of potential answers.

Systemic stabilization. Periods of booms and busts. This provokes instability between advanced and underdeveloped nations. Small fluctuations in the advanced nations produce large consequences for the wellbeing of the less advanced.

Employer of last resort This produces stabilization and while it applies to advanced countries the stabilizing effect contributes to the wellbeing of the poorer nations

Embodied Knowledge

Ernesto Illy pointed to the new economic situation created by embodied knowledge. A person who sells a sack of coffee beans gains in profits but loses his asset—the beans. But someone who sells knowledge or software gains in profits and at the same time retains his asset to sell again and again. This exchange is a force that is increasingly leading to asymmetry between the First and Third worlds. Traditionally the Third World exported its raw materials to the First who added value in terms of processing. But now the Third is also being compelled to buy knowledge and information on advanced technologies from the First, assets which are never depleted in the First World.

Ed Nell had another point to make. The best minds are going into the financial market and working at developing derivatives. This means that the allocation of important social forces—creative intelligence—is being channeled into one narrow area. Anything that can reduce the drive for short term speculation (and there is an enormous amount of money that is constantly being exchanged across the world, 1000x more than goods and services, and this leads to an unstable world). An example such as the Tobin tax may help to shrink this market and release an important social resource.

War

David Peat brought up the issue of war, its origins and the enormous cost to human populations in terms of mutilation, famine, disease and the breakdown of infrastructures. Economics and the market can have a strong influence on the origins of war and could suggest alternative means to resolve conflicts. These are both issues of the marketplace and of what perhaps could be called globalized ethics. Narenda Gaonkar strongly agreed pointing to the marked effect on the Indian economy and development of periods of war and periods free from the threat of war. Clearly this issue of the persistent and ingrained culture of war must be addressed at the global level.

Transparency

In making ethical and economic decisions one must also be aware of short- and long-term consequences. Yet so much of our modern world consists of complex interlocking systems that it may be very difficult to judge or predict the outcome of actions and behaviors. David Peat proposed that decisions and behaviors be made more transparent through a series of research projects and accounting exercises. For example, a research group has recently calculated the stresses placed on the environment by the creation of a silicon chip. (And with today’s technology people expect a turn-over in their computers every three years.) While environmental cost of computers is now transparent it may be far more difficult to calculate the social good, in the long and short term, and benefits of social transformation, the generation of new work, etc, produced by the new technology.

In many other areas, environmental groups have created accounting models for other stresses on the environment—which then lead to more informed decisions. Clearly such an approach could be applied to other areas of life in order to give a more rational basis to behavior. Warwick Fox argued that ethical decisions must be based on much deeper principles than mere costs and benefits. Siraj Izhar, however, pointed out that making costs transparent can be a persuasive argument to governments and corporations.

Global Inequality

Roy McWeeny addressed the issue of global inequality and poverty. He stressed the particular role of science, and of the resultant Advanced Technology, on which developed societies are now so heavily dependent: the dramatic material progress in the more affluent nations would not have come about without it (nor would globalization!) but the cost has been heavy. The poorer countries must now be helped to escape from their ignorance, strife, poverty, and malnutrition, which in turn have led to greed, lust for power, corruption, repression, and war. It is time for the developed nations to invest massively in schools, education, roads, transport, hospitals and the general infrastructure of the Third World—even without any expectation of short-term economic reward.

If money could be used more constructively then many of the world’s problems could be solved. But funds are being wrongly spent and global corporations have largely escaped the fiscal control of individual nation states. Only collective super-national action can be effective. John Avery (member of Pugwash) has pointed out, for example, that the rate of illiteracy in the 25 least developed countries is 80%. There are 800 million illiterate people in the world. Yet every 60 seconds $2million is being spent on arms.

This is a moral issue; the richer nations must act without thought for material gain. But where is this funding to come from? The IMF and the World Bank won’t take responsibility. Those who are involved in global markets must take responsibility for the human race. But how can they be made to accept their obligations and ethical responsibilities? They must be stimulated and the only world body capable of doing this is the United Nations. Clearly the world must move towards a form of world government.

Siraj Izhar pointed out a further complication. It is so often the case that the educated classes in poor countries come to the West to obtain further education. If they do return to their countries, then they form an elite that does little to help those who are poorer. In those cases where corruption is endemic it is because it is the only way such societies have found to survive. Maybe it is their particular way of creating a functioning economic system in the face of dominant Western nations. Izhar felt that corruption will continue until those countries can participate in international economics. Again it came down to Nell’s maxim of ‘no economic impact without representation.’

While the meeting agreed in principle that funding was badly needed, there was discussion on the source of such funds. McWeeny suggested that there should be a variable tax on the profits from global corporations, with funds being passed on to U.N. development agencies. Highest taxes would be placed on the arms industry. Even a microscopic tax would raise billions of dollars. It would be distributed directly by U.N. agencies in consultation with the international community and beneficiaries.

Several of the economists were not so happy with the notion of a tax on profits and while agreeing that a tax on the arms industry was ethically attractive, they pointed out that arms dealing was often an underground activity that is very difficult to monitor.

The Tobin tax was an alternative source of income. This is a proposed 0.005% tax on financial transactions. Given the immense size of foreign exchange it would generate enormous funds. In turn it may act to slow down and reduce the volume of financial exchange and shrink the financial sector. A further source of funding would be the ‘bit tax’ on the flow of electronic digital traffic as proposed in The New Wealth of Nations: Taxing Cyberspace, Between The Lines, Toronto, 1997. ISBN 1-89637-10-5

Arthur J. Cordell, T. Ran Ide, Luc Soete, Karin Kamp. This would be analogous to a gasoline tax on the information highway.

Research Projects

Towards the end of the meeting the group considered a number of research projects that could be carried out at the Pari Center.

• A. Plotting a Landscape

There had been much discussion of the marketplace as a non-linear, self-organizing system that produces its own dynamics, bifurcation points, attractors, areas of potential chaos, feedback loops and multiple solutions. Corporations’ dynamics are influenced by attractors. These attractors can be two-fold. In the short term they could be thought as profits (money) and the long term they would be ‘wellness’ for society and the environment in general. It is important to sensitize people to this new view of defining the field and the attractor.

The priority of a business is to satisfy consumers, the consequence is profits and not the goal. But the market is so complex that there can be unintended consequences. It would be useful to present this visually in terms of dynamical models and to sensitize people.

Illy therefore made the proposal that such landscape be produced visually—for example, in the form of interactive dynamics models or even as ‘games.’ As symbols for the marketplace they could influence corporate thinking and produce new forms of strategy.

• B. What Next?

Ed Nell suggested that it was time to think more speculatively about the future of the market and economic theory. He pointed out that at the start of the fifteenth century a new order emerged in North and Western Europe that led to constitutional government and the capitalist system. This was association with the rule of law, justice, and universal monetary system and resulted in some spectacular developments in science, technology, and a financial base from which to develop ideas. To a large extent this system and its benefits remain in the hands of its creators, i.e., Western Europe and its colonies.

But such a system may not go on forever. Increasingly the market is moving away from the tradition of goods and services towards communication, education, entertainment and so on. These are collective goods and involve a network of externals. But traditional markets are not well geared to internalizing such externals. Perhaps in the new economy, new modes of production, distribution, pricing and compensation may be needed. We should be thinking about such an alternative future. Maybe the present capitalistic system will not work too well. But what are the alternatives? A return to socialism does not appear credible. Maybe now is the time to speculate and look at the agenda of history.

Nell felt that such a study would require the collaboration of economists, business representative, anthropologists, environmentalists and ethicists and philosophers—an ideal mix for a Pari Center environment.

Alessandro Vercelli was in agreement with Nell’s analysis but felt that events were moving even faster and that economists must develop instruments for internalizing externals, calculating costs and benefits and regulating the market.

The tragedy of the last twenty years has been the philosophy of deregulation and neo-liberalism. This has led to short-term vision and a lack of ethical standards. The IMF and World Bank had been set up under the Bretton Woods agreement but, rather than following their original policy of avoiding deflation and reducing unemployment, they had become more concerned with inflation and had done little to reduce unemployment—with its spin-offs of poverty, crime, inequality and exclusion.

Vercelli’s solution was to return to regulation and reintroduce a new version of the welfare state—but in wiser ways, having learned of the mistakes made in the post-World War II years. Clearly such an approach would involve hard political decisions.

• C. Networks

Siraj Izhar proposed a different model and research project to that of Nell. He pointed out that more and more people are using technology to generate distributed networks. In turn these networks produce new resources and new economic models. A network society is not about cities but about new and evolving dispersed cultures. These can create material goods and social change in new ways.

Siraj viewed (b) as involving a think-tank investigation of macro-economic futures. (c) however, could be a microeconomic activity which actually initiates various tasks and, in this way, would add practical flesh to new ideas, thoughts and theories.

• D. Self Organized Market

Visualizing the marketplace as a non-linear self-organized system that is, in turn, embedded in a social and environmental context, suggests additional areas of research. Analogies can be pursued with natural systems and with physical systems such as the electron gas plasma—in which both individual and collective variables are needed to describe the dynamics (freely interacting individuals contribute to the collective, in turn the collective exerts an influence on individual motion).

According to such a model exerting control on the market, and corporate behavior would take place at two levels—the macro and micro. Macro control would arise at the level of national or international policy. But one should also note that self-organized systems can be resistant to attempts at external control, having the ability to ‘bounce back’ when influenced by external perturbations. At the micro level, change could be brought about at the level of subtle changes in the individual couplings or interactions of the various players in the market. In other words, at the level of corporate behavior. Clearly notions of ethical standards or an ‘ethical field’ in which the corporation is immersed would be important in this latter case. This may have connections to what David Peat has termed ‘Gentle Action,’ a subtle but highly intelligent action that emerges out of the system as a whole.