New Year's Resolution: Ethics Is HR's Business

I submitted the following article to the American Institute of Certified Public Accountants' newsletter, AICPA Career Insider. 

New Year's Resolution: Ethics Is HR's Business

Mitchell Langbert,  Ph.D.

In the last two years several leading institutional players,  to include the Society for Human Resource Management, the Business Roundtable's Institute for Corporate Ethics, and the Deloitte accounting firm have noticed that trust between firms and their employees has flagged and that trust can, or ought to be, viewed as an ethical issue.  A 2009 Business Roundtable and Arthur W. Page Society survey found that the public sees a power imbalance that enables business to abuse its position.  The Business Roundtable recommends renewal of public trust in business through common sense:  the production of quality services; steady jobs in healthful environments; and reasonable stockholder returns. Last year, Deloitte found that of one third of Americans who plan to seek a job, 48 percent cite a loss of trust due to poor communication as a reason.  Deloitte notes that lack of trust affects talent management.  Moreover, competence and ethics go together.  91% of employees say that they are more likely to be ethical when they fit their jobs. 

But, if we are to believe Adam Smith's Theory of Moral Sentiments,  trust is, as statisticians might put it, a dependent rather than an independent variable. That is, trust depends on good ethics. It is not good ethics. As Smith argues[1]:

Our rank and credit among our equals…depend very much upon … our character and conduct, or upon the confidence, esteem and good will which these naturally excite... 

Three virtues, in Smith's view, constitute good character:  prudence with respect to our dealings, justice and beneficence with respect to others. Self-command is needed to ensure that knowledge of the right thing to do is accompanied by ethical action.[2] In these claims Smith follows the ideas of Plato, Aristotle and the Stoic philosopher Zeno, who emphasize virtue and self-restraint.  Smith distinguishes between commutative justice, according to which which we do no harm to others and distributive justice, according to which we give due credit. Much as Deloitte found, Smith argued in 1759 that a good life-work fit relates to ethics[3]:

(W)e are said to do injustice to ourselves when we appear not to give sufficient attention to any particular object of self-interest. In this last sense, what is called justice means the same thing with the exact and perfect propriety of conduct and behavior, and comprehends in it not only the offices of both commutative and distributive justice, but of every other virtue, of prudence, of fortitude, of temperance.

 

Smith writes in the Aristotelian tradition of virtue ethics, according to which virtues or competencies ground ethics.  In Nicomachean Ethics  Aristotle claims that virtues, especially prudence, self-command, courage (risk neutrality) and most of all justice  need to be applied through practical wisdom and deliberation, which are similar to what Daniel Goleman has called emotional intelligence.[4]

Virtue Ethics as Emotional Intelligence

The 18th century Enlightenment philosophies of David Hume and Immanuel Kant created a gulf between ethics and competence.  Hume claims that there is no logical foundation for ethics and that ethics is pure emotion. Kant claims that ethics is based on practical reason.  In the late twentieth century Alisdair MacIntyre[5] pointed out that the attempt to absolutely ground ethics in emotion or reason through sweeping philosophical systems lead to Nietzsche's nihilism and rejection of ethics altogether.  Nietzschean nihilism is reflected in the evolution of management thought through writers like Chester Barnard, who claims that morality is malleable and grounded in the executive's ability to manipulate employees' emotions.[6] Arguably, the Nietzschean mindset has influenced fallen managers and investment bankers like Jeffrey Skilling and Ivan Boesky.  It is unfortunate that the Nietzschean view has come to be associated with business and capitalism when capitalism  more directly rests on the benevolent self-interest of Smith and Aristotle. 

Once the gulf between emotional intelligence and practical wisdom is bridged Milton Friedman's claim that business's job is to produce a profit in opposition to corporate social responsibility falls by the wayside.  It is business's job to produce a profit consistent with ethical norms, justice and benevolence. Neo-classical economic theory makes similar implicit assumptions.  The equation of wage and marginal revenue product echoes Aristotle's concept of justice as proportion, and some philosophers even have controversially claimed that Aristotle was the first to enunciate marginalist economic theory.   Given the free market's foundations of justice and benevolence,  illegal or unethical behavior is as bad as losing money.  We have seen this demonstrated again and again in government and business.  The failures of Robert Moses and Robert McNamara in government were failures of competence.  The failures of Long Term Capital Management and Arthur Anderson were also so.

Ethics Is a Human Resource Function

The Sophists were the first to claim that ethics is relative and can be viewed as a teachable competence.  Plato argued that ethics has a natural foundation and it depends on universal Ideas.  Aristotle agreed that ethics depends on natural foundations but that it needs to be applied particularly, to the appropriate circumstances, and the competencies on which it depends are subject to what March and Simon, 2,400 years later, call bounded rationality.[7]  Smith saw his ethical system as consistent with the Aristotelian view. Several Enlightenment philosophers, most importantly Kant, rejected Aristotle's emphasis on judicious contextual and particular application of virtues and argued for Platonic ethical universality.  This has the unfortunate effect of banishing ethics from profit seeking because there are always exceptions to universal ethical laws.  The exceptions debase ethical currency and managers adopt Nietzschean nihilism. In contrast, Smith grounded his ethics on virtue and competency and does not make universalistic claims.  Smith argues that culture modifies underlying natural ethical patterns.

Human resource managers are expert in understanding and applying competencies.  Job analysis is the gathering of valid information about jobs including job specifications or tasks and job criteria or competencies.  In fact, the trend in job analysis has been away from emphasis on duty or task and toward competency.  Yet, the classical Greek word for competency, arête, is the same as the word for virtue.  Hence, in Aristotle's view (if Aristotle could have imagined a world based on technology and trade, neither of which he saw as important or even desirable beyond a small degree) human resource managers are the arbiters of virtue in the corporation. Moreover, there are universals but they are modified by circumstances.  Universal rules need to be tempered with judgment and deliberation.

More to the point, justice is the fundamental competency on which all job responsibilities are based. Its application is imperfect and subject to cognitive limits on rationality. Practical deliberation and judgment are crucial to all professional and managerial jobs but without justice cooperation and coordination necessary in large firms are impossible.  Hence, HR managers ought to be the advocates of justice in the corporation.  For upon justice prudence, benevolence and all other competencies as we define them today depend.

---

[1] Adam Smith, Theory of Moral Sentiments. Boston: Wells and Lilly, 1817.  Volume II, p. 26

[2] Ibid., p. 65

[3] Ibid., p. 112

[4] Daniel Goleman, Emotional Intelligence: Why It Can Matter More than IQ. New York: Bantam Books, 1995.                             

[5] Alisdair MacIntyre, After Virtue: A Study in Moral Theory. Notre Dame, Ind.: University of Notre Dame Press, 1981.

[6] Chester Barnard, Functions of the Executive. Cambridge, Mass.: Harvard University Press, 1938.

[7] James G. March and Herbert Simon, Organizations.  New York: John Wiley and Sons, 1958.

It's Elementary, Watson: Chuck Your Copy of The Week

I had to wait in a doctor's office this afternoon during my wife's visit.  I opened a magazine called The Week.  I hadn't read any legacy media publication in eight months.  The Week selects articles from other legacy media, claiming to offer "the best" of the week. I was surprised at how bad The Week's material is.  It is not just dumb and lacking in perspective. The ideological tenor is shrill.  The writers are so badly educated that they cannot develop coherent arguments.  Republicans, in The Week's opinion, are ignorant fools who do not believe the obvious scientific proof of global warming. Of course, that proof is not discussed. Nor do the editors seem to know what the scientific evidence is. They read that it exists in The New York Times and anyone who disagrees with The Times is, in their view, foolish.  In short, it is The Week's editors who are fools.

They certainly think they know what science is.  In their opinion there is a consensus of opinion, developed by The New York Times, and anyone who disagrees with the consensus opposes science. They are unfamiliar with elementary concepts such as falsifiability.  More so, The Week does not provide news.  Because the editors lack the education to grasp what drives current events, they are incapable of discussing current events coherently.  The information they offer is a tale told by an idiot.

The Week reminds me of Sherlock Holmes.  Recall Holmes's remarks in A Study in Scarlet and elsewhere that one should avoid mental clutter in order to do one's job efficiently.  My recollection is that he also says somewhere that he does not know that the earth revolves around the sun and that he intends to forget the fact as soon as possible.  The legacy media makes me feel like Holmes. The information it provides is meaningless; the incoherent chatter of owls and cuckoos, asses, apes and dogs.

I attended the Kingston-Rhinebeck Tea Party last night. About 30 people were present. The discussions were lively. I spoke to the group about organizing letter writing and publicity campaigns.  Many people are interested in taking part. The founder, Tom Santopietro, mentioned that the teachers' unions in New York have over 400,000 members (disclosure: I am a member of the New York State Union of Teachers, NYSUT).  The Tea Party has its work cut out.  But a gradual organization can begin to form a meaningful resistance to the government-Wall Street nexus.  I am being optimistic, of course.

I got a gift certificate to Applebee's and my wife and I had dinner there tonight. The waitress was from Albuquerque and she told us that houses in Taos, one of my favorite places, cost about $180,000 and condos cost somewhat less.  The question occurs to me, why bother with New York?  I don't have an answer other than that my job is here and I spent ten years rehabbing my beautiful home.  Other than that, New Mexico seems like a good option.

Howard S. Katz, RIP

My old friend and former business associate, Howard S. Katz, has died according to Kitco.com and Zionist Gold Report (h/t Glenda McGee).  Zionist Gold Report cites an obituary in the Nashua Telegraph.

>According to an obituary in New Hampshire’s daily newspaper, Nashua Telegraph, Howard S. Katz, a long-time commentator on Kitco.com passed away on Dec. 23, 2010 at the age of 72. Howard was a financial analyst and editor-in-chief of The One-Handed Economist and the former Gold Bug Newsletters. He was born in Providence, and had lived in New Hampshire for 10 years.

>His biography on Kitco.com states that he was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965. He turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.). Howard was also the head of the Committee to Establish the Gold Standard and worked with Congressman Ron Paul for the passage of the American eagle gold coin bill of 1986.

>He published several newsletters; The Speculator (1964- 1972), The Gold Bug (1973-1986) and The One- handed Economist (1996-present). He is also the author of three published books on money: The Paper Aristocracy (1976), The Warmongers (1979) and Honest Money – Now! (1979).

 

In the late 1970s, before I moved to California to attend the UCLA Graduate School of Management, I was the treasurer of Katz's Committee to Establish the Gold Standard.  At the time Howard lived in a small apartment on Fourth Avenue in lower Manhattan.  I worked with him on his congressional campaign bid in Manhattan (I may have been  his only staff member).  I was learning to drive at the time, and Howard gave me a few tips.  Although he came in near last in the race he spread the pro-gold message.  Ronald Reagan was elected a year or two later.  The end of the late 1970s' high inflation, as Howard liked  to emphasize, was the product of the Carter administration, not the Reagan administration. President Carter had appointed Paul Volcker, who adopted monetarist Fed policies.  Volcker's policies popped the Keynesian stagflation of the 1970s that followed upon Richard M. NIxon's pronouncement that “we are all Keynesians now”; the out-of-control public sector unionism in New York and elsewhere; and the monetary policy-induced inflation of the late 1960s and 1970s. But, as Howard also frequently emphasized, Reagan renewed the inflationary pattern through the Keynesian supply sider argument.

Howard had been a member of the Free Libertarian Party in Manhattan prior to my joining it in 1977.   A few years ago Howard gave me his unpublished manuscript Wolf in Sheep's Clothing that I have yet to review. I had reviewed a draft of his revised "Paper Aristocracy" which I do not believe was re-published.  Paper Aristocracy is out of print but sometimes used copies are available at Amazon.com.

I recall clearly his visiting Congressman Ron Paul in the late 1970s  to discuss gold issues with him.  Hence,  Katz has influenced Paul's pro-hard money ideas today.  Katz unquestionably has influenced national debate on monetary policy and renewed public concern about the Federal Reserve Bank. 

Before any one else in post World War II America, Katz emphasized the Jacksonian insight that the central bank is a redistribution mechanism from poor to rich.  Hence, the Keynesian claim that the Fed helps labor and small business is pap.  He claimed that economists and advocates of progressivism fall into two categories: the smart dissemblers who are manipulating the system to their and Wall Street's advantage, such as Alan Greenspan, and the vast majority of useful idiots, economists who actually believe the Keynesian theory.

Howard made similar points about the Fabian socialism of people like Sidney and Beatrice Webb, namely, that their socialist ideologies were a "wolf in sheep's clothing."  He argued that there are two categories of advocates of destructive socialist policies: those who actually believe them, the majority of useful idiots, and those who understand their vicious implications and use them to gain power.

I lost contact with Howard when I attended UCLA in 1979.  In 2004 or so in the face of impending gold price increases I spent several weeks attempting to renew contact and tracked him down in Nashua.  At the time, he published his newsletter, the One Handed Economist, via Xeroxing.  I suggested that he start a small website, which we did after a year or two of deliberation.  He asked a different friend to run his website about two years ago. Also, he changed the name to "the Gold Speculator."

Howard had a tremendous effect on many libertarians' and gold advocates’ thinking.  He will be sorely missed.

Globalization and Human Resource Management

I am teaching an online human resource management class this month.  One of our first day's discussion boards was about globalization and human resource management.  I sent the class the following e-mail to cap off the class discussion on globalization and human resource management:

>The class is more balanced with respect to globalization than my classes last semester.  Globalization gets bad press but I am for it, although not in the way it is done.  The theory of comparative advantage that David Ricardo first expressed in the early 19th century shows why trade works.  Each country has relative strengths and weaknesses. If each country does what it is relatively good at (not necessarily better at than other countries, just what it is relatively productive at compared to its other opportunities) then the world will produce more and the greater productivity can be exchanged globally, making each country better off.  Tariffs and other trade restrictions thus prevent possible gains from trade.

The worst examples of tariffs were during the 1840s in Britain and Ireland and in the 1930s in Russia. In both instances there were mass starvation, first of the Irish during the Potato Famine and second of the Ukrainian kulaks under Stalin's socialism.  These two instances of trade restrictions amounted to mass murders, the first of  one million deaths and the second of I believe about 10 million deaths. Thus is the promise of tariffs, trade restrictions, economic autarky (whereby everything is manufactured at home) and government intervention.

While such extremes are unlikely here, at least in the near future, there are other repercussions to trade restrictions.  For instance, trade restrictions preceded the Second World War.  The Smoot-Hawley Tariffs, the most extreme in American history, were passed in 1930 at the outset of the Great Depression. It is difficult to prove that World War II and the Great Depression were entirely caused by the Smoot Hawley tariffs. But it is astonishing the labor movement now advocates similar kinds of tariffs.

The Great Depression was far worse than any that preceded it and there was much less government intervention in the economy until within 20 years of the Great Depression.  Hence, the Smoot Hawley tariffs and the increased regulations of the 1890-1920 Progressive era and the New Deal along with the establishment of the Federal Reserve Bank in 1913 all may be part of the reason for the Great Depression of the 1930s.

Astonishingly, Americans under George W. Bush and Barack H. Obama have opted for policies that are similar to the policies that were adopted preceding the Great Depression: expansion of the money supply, more regulation, higher tariffs. Have fun, guys. My career is drawing to a close. You are the ones who will be hurt by economic insanity.

One of the chief policies that the Federal Reserve Bank and the US government have emphasized is ever increasing foreign indebtedness.  Numerous foreign countries have been holding large shares of treasury bonds. This has the effect of propping up the dollar.

The natural response to excessive outsourcing ought to be a weakening dollar.  As firms move overseas demand for dollars declines. When the dollar declines demand for foreign goods also declines and firms move back.  But the US government and the Federal Reserve Bank have orchestrated a pattern where foreign countries hold our debt, keeping import prices low.  Thus, the two-party system, specifically including the Democrats under Obama and the Republicans under Bush, have pushed for policies that ensure that jobs leave the country.

Of course, given the huge indebtedness now to foreign countries, if those countries were to unilaterally sell off the US debt there would be a currency collapse here. The dollar would be worth pennies, much like the Papiermark in Weimar Germany in the early 1920s.

The effect of the twin policies of monetary expansion by the Federal Reserve Bank coupled with subsidization of the dollar by foreign central banks and governments has been a weakening of the manufacturing sector here and the comparable strengthening of the competitiveness in European and emerging market countries, for instance, the BRIC countries, Brazil, Russia, India and China. At the same time, consumers here are better off than they ought to be as merchandise is at low prices.  However, the inflation due to the Fed's monetary expansion can be seen in the rising property taxes and cost of services such as construction, government, health care and education.

Thus, it is inaccurate to view globalization and its implications as separate from monetary and Federal Reserve Bank policy. These issues are linked as well to human resource management.

Many students note that culture clash, complexity and the need to increase skill levels are coupled with slow job growth, outsourcing and increasing competition.  All of these factors coincide with monetary policies.

There will be no easy way out for the US.  The dollar will become weaker and consumers will be worse off before manufacturing will return here.

There were several interesting responses to this discussion board, one of which was R's:

"Some employees who have lost their jobs have either relocated, changed their career, returned to school, negotiated with their former employer for a part-time position, pay-cut, or have accepted a lower level job. In turn, this has often led to a decline in living standards.

"2. Many employees who had maintained their jobs, felt insecure and were under constant pressure at work. This led to chaos, over-achievement, competition to outperform colleagues and an obvious decrease in desire to help co-workers leading to decreases in efficiency and lower product quality. This marked a  withdrawal in loyalty toward the employer and the employer’s goals. The low morale and insecurity would also heighten the employee's interest in social insurances (health, social security, education…) as the fear of job loss intensified.

"3. On the other hand, the import of these goods manufactured offshore has created end-line positions at retail stores...This yields a boost to the nation’s economy and the acceptance of diversity and multiculturalism. It can also foster positive feelings towards others cultures and harvest communication and cross-cultur(al) exchange of ideas on an international, national and intra-company level. (Of course the reverse exists due to globalization as well, with Dunkin Donuts, Starbucks, Walmart, McDonald's etc…  opening worldwide.)"

All of these behavioral and economic outcomes are linked not only to globalization but also monetary policy.

The error virtually everyone who discusses this makes is to blame globalization for phenomena that would not occur without the Federal Reserve and other central banks' monetary policies that have pegged other world currencies to the dollar.  The dollar has been propped up, encouraging exodus of manufacturing jobs.  If the propping stops, consumer prices of imports will rise and job losses (and foreign trade deficits) will come to a halt.