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Norms! (and the betrayal of trust)

Norms! (and the betrayal of trust)

by digby

I’ve been musing a bit about the erosion of norms the last few weeks, trying to understand how it is that our society has lost its former counterbalance to harsh, dog-eat-dog capitalism, something I do believe it had more of in the past. Matt Yglesias flagged something earlier this week that adds to that discussion. He’s talking specifically about the critique against private equity’s use of debt, which he rejects. I’m not going to take a position on that, I’m interested in this:

The strong case against private equity comes from an old 1988 paper from Lawrence Summers and Andrei Schleifer titled “Breach of Trust in Hostile Takeovers” which mostly uses ’80s terminology rather than contemporary PE lingo.

Their starting point is Ronald Coase’s observation that the existence of companies (“firms”) is left a bit mysterious by econ 101 reasoning. Why don’t free agents just contract with one another for services as a means of economic cooperation? One reason, he argues convincingly, is that trying to spell out each and every obligation in contractual terms would be both laborious and absurdly inflexible. If you think about the way your workplace actually functions, people have roles and obligations vis-a-vis each other that are considerably richer and more nuanced than what’s spelled out in legal documents. These roles evolve over time in various ways, but they also have some stability to them. The point is to create a space of collaborative endeavor that isn’t dominated by constant lawyerly bickering.

Summers & Shleifer observe that this often creates substantial arbitrage opportunities. You can buy up a company and then exploit your formal rights as owner to the hilt completely ignoring inumerable tacit bargains and promises. Indeed, since you the new owner didn’t actually make the promises you may feel that you’re not bound by them.

The big socialized loss in the case of this kind of “breach of trust” scenario is loss of trust and economy-wide loss of ability of managers and workers to form flexible implicit arrangements with one another.

I think this applies more broadly than this specific sector of the economy. The “breach of trust” scenario is an even bigger cultural phenomenon — the erosion of social norms. I don’t know if this wider problem can be traced to this change in capitalistic practices, but I suspect it is at least related.

I believe we have a group of elite actors — across sectors — exploiting their formal advantage and actively “ignoring inumerable tacit bargains and promises” (also called norms.) I’ll give you a good example: the impeachment of President Clinton.

The truth is that the congress can impeach a president at will, subject only to the voters in the next election. Now, there is a powerful disincentive to do it against a popular president. But why don’t they commonly do it against unpopular presidents? “High crimes and misdemeanors” is a very vague term and as we saw with the Clinton case, you can fit nearly anything into it if you want to. But we’ve only had two presidential impeachments in more than two centuries. The first one was the political tail end of our bloody civil war, with the country still reeling. And then we had nothing until suddenly, at the end of the 20th century, with the country at peace and brimming with prosperity, the House of Representatives decided to hit the trip wire over a private indiscretion for purely partisan purposes.

Until then it had been one of those “tacit bargains and promises” that this power would not be used except in the most dire circumstances. Obviously, there was no law against it — it was explicitly provided for in the constitution. But everyone understood that the spirit of our democratic system was that a president was to be allowed to serve for four year terms at the pleasure of the voters unless something extremely unusual happened. The destabilizing effect of putting a president on trial for anything but the most serious reasons was assumed to be an irresponsible act that no one would attempt.

In the end, it was the displeasure of the people and the founders cynical view of human nature that stopped it. (The polls supported the president and the super-majority requirement for a Senate conviction couldn’t withstand a purely partisan action.) But what’s significant about this is that the taboo was broken by people who believed they could gain a partisan advantage by exploiting the letter of the constitution, even if it destabilized the entire system that’s kept us going for a couple of centuries. (This is the essence of our current fascination with clever opportunism, the extolling of the smart operator (like Romney) who knows how to work the system.)

And, frankly, it worked. The GOP was not punished for its actions. Indeed, it turned around and did the same thing in the next election when it manipulated the electoral system to take the presidency and was rewarded with legitimacy by the American people in spite of it. We are seeing a similar phenomenon in regards to our economic institutions in the wake of failure.

Something shifted. I don’t know how big a shift it will turn out to have been. But just as the banking system nearly collapsed under the weight of enormous complexity, our political system isn’t as stable or as able to handle the complexity of governing a giant, powerful nation as it needs to be. And I think this has something to do with it.

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