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TIMES BOARD OF ECONOMISTS

Markets Need Infusion of Morality

February 24, 1987|Lawrence R. Klein | Lawrence R. Klein received the 1980 Nobel Prize for economics. He is a professor of economics at Wharton School, University of Pennsylvania, and was a founder of Wharton Econometric Forecasting Associates

The unfolding insider trading scandals, coupled with a previous check-kiting scandal, present a dismal picture of morality in our financial markets. The breaking of the rules is not new, but the sums involved are so large, the malpractices are so widespread, the deeds reportedly are so blatant (suitcases of currency passing hands, day trips to offshore banks) and the danger of loss of confidence in our institutions is so great that we should be concerned enough to take a hard look at the situation.

As a teacher at a business school, I am disturbed by what I sense is scant interest among my colleagues in trying to do something about the abuses. Many faculty members take the attitude that they are not responsible for teaching business ethics and morals because that is the function of church, family and upbringing. I have helped teach an MBA course dealing with conflict of interest, bribes, banking responsibility, grievances and similar subjects, but a single course is inadequate.

Many colleagues present a knee-jerk defense of the present market system and see little cause for concern on the basis of wrongdoing that has been brought to light. Others are simply not interested. Only a few participate in classes that are aimed at trying to understand the ethical and moral issues. Actually, when one looks carefully at the substantive subject matter of classes in business ethics and morals, it turns out that there are more analytic and formal issues than one might suspect.

We teach our students to maximize their economic positions within the legal and ethical boundaries of our system, but when they approach these boundaries in the exciting atmosphere of business life, they may overstep. Careful consideration of these possibilities in business school classes can be helpful. For instance, during the course of ordinary business affairs, a great deal of hearsay, rumor and scattered bits of information are circulated. When does this constitute inside information? This is a difficult question that merits analytical discussion.

Dual Claims

When a banker addressed our class on responsibility, we learned that there are dual claims, by shareholders and by depositors. There may be situations where they come into conflict, and the primary role of bankers as custodians of other people's money must be weighed against risk taking to earn profits for shareholders. These are certainly issues that should be emphasized to our students. So should the ethical issues raised in workplace grievance procedures, which in many cases call for Solomon-like wisdom.

The pastoral letter of the American Catholic bishops on the American economy did not deal specifically with the present Wall Street antics, but its message is quite relevant. It deals very much with problems concerning the distribution of income and wealth in our society, and the illegal practices among extremely well-paid financial specialists have much to do with that. If people in very high income groups are breaking the law to make even more money, we're accentuating the distribution problems.

The lukewarm reception accorded to the bishops' letter in academic economic circles and the hostility toward it by some lay business interests seem wholly misplaced in the present environment. It is fortunate that the pastoral letter has been put before us at this time; it is unfortunate that it is not receiving enough attention in serious academic discussion at a time when economic morality has deteriorated so much.

Why does the moral fabric of the financial sector and the economy at large seem to be coming apart? One explanation is that our authorities are rushing headlong into deregulation and are condoning unfettered business practices because they are seemingly based on free market principles. One of the deepest remarks in the pastoral letter states that "some things are never to be bought or sold." High on the list are inside information and the like, but this is a message that does not seem to have percolated into markets where contraband is indeed bought and sold.

Peril of Permissiveness

The market system works toward a so-called optimal allocation only if information is widely available on an equal basis to all participants. Without closer supervision, this condition will not prevail, and the market solution will produce distortions. That is the scientific root of the trouble.

The coexistence of our twin deficits--the federal budget deficit and the foreign trade deficit--forces us to rely on a net influx of financial capital from abroad to support our government's steady borrowing without pushing up interest rates. So far, confidence in American assets has been so great that we've gained extra time to bring our deficit under control. But the permissiveness that creates an environment of wrongdoing can easily lead to an exodus or diversion of foreign funds that could turn our present adjustment process into a dangerous collapse, leading to rising interest rates and domestic and international recession.

The stakes are high. A revival of economic morality is needed to shore up confidence.

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