The Economist recently published an article called Fine and Punishment: The Economics of Crime Suggests that Corporate Fines Should Be Even Higher. It’s fascinating reading: it suggests that we can economically calculate how to deter corporate malfeasance.
As the article puts it:
The economics of crime prevention starts with a depressing assumption: executives simply weigh up all their options, including the illegal ones. Given a risk-free opportunity to mis-sell a product, or form a cartel, they will grab it. Most businesspeople are not this calculating, of course, but the assumption of harsh rationality is a useful way to work out how to deter rule-breakers.
In the US, anti-trust penalties run up to 40%; in the UK, they’re more like 10%. In either country, the article notes, crime pays. In fact, the ROI is downright incentivizing. So it’s no surprise, the article suggests, that crime seems to be undeterred.
Prosecute the Bastards!
You might think, well then, raise the penalties – massively. Here’s the Economist’s logic on why that is, tut-tut, really not such a good idea at all, don’t you know:
There are plenty of arguments against ultra-high fines. One is that false convictions carry too high a cost. Another is that fines of this sort could cripple firms, reducing competition.
Argument the first. The cost of a false conviction in a personal capital case is, let me see – oh yes, personal death. The cost of a false conviction in a corporate cartel case is – the falsely accused corporate entity pays money. Why do I feel the “too high a cost” argument doesn’t cut it here?
Argument the second. Ultra-high fines could reduce competition. Unlike anti-trust violations? Unlike price-fixing? Is this really The Economist proposing this twaddle?
Ethics Without the Ethical Part
Here’s the thing. The entire article is about ethical issues, yet never once mentions ethics. It’s one thing to include a caveat like, “Here we’ll discuss a purely utilitarian view of ethical behavior.” Fine. But to never even mention the existence of another approach to ethics is fodder for paranoid amateur ethicists like me.
Do you think maybe, just maybe, one of the reasons white collar crime is so much on the rise is that no one – most especially not the Fourth Estate – chooses to describe unethical behavior as being – unethical?!
Some of it, I suspect, is style. In too many self-congratulatory business and academic circles it is just uncool to use that word. It’s hip to be a deconstructionist, neuro-whateverist, or a student of behavioral incentives – and maybe to study ethics in kind of an anthropological way. But certainly not to believe in the stuff!
Sorry: if we conduct business solely as an exercise in self-aggrandizing profit maximization, then we will get self-aggrandizing profit-maximizing behavior. If we teach business ethics as a series of cases analyzing the balance of power between “stakeholders,” we will get what we teach.
What would it look like if we actually called ethical violations by their proper name? We would have business, social end educational leaders insisting on massive sanctions, and not because of their deterrent power – but because of their symbolism.
Where is the language of outrage? To fix LIBOR rates, to rip off customers, to lie to the public – these things should be called by their proper names. Those names would be right and wrong, unethical, immoral, outrageous, anti-societal, sociopathic. Mostly just “wrong.”
The ultimate proper penalty is not more of the same lousy financial currency. It is another currency – the currency of social respect. We need to see condemnations, demands for apology – we need public shaming.
Not Just an English Economist Affectation
And now, ripped from the headlines: a few days ago, the IOC booted four pairs of Olympic badminton teams for intentionally throwing their games. In an intriguing HBR article called Bad(minton) by Design, authors Scott Page and Simon Wilkie argue that:
While many are blaming the players, the real fault lies with the organizers for designing a tournament that encouraged throwing matches. The solution — apart from banning those pesky Danes and other “upsets” — lies in better design. [Italics mine].
They point out – quite rightly – that the design of the tournament (single elimination after pool play) provides perverse incentives to throw a match – assuming that your objective is to maximize your chances to win an Olympic medal. Interesting, to be sure. And their suggestions make sense; after all, why suborn unethical behavior unnecessarily?
We might even agree with the authors’ conclusion: “If you don’t consider incentives and strategic behavior, there will come a day when strategy trumps ethos. We would do much better to design organizations from the outset with Denmark in mind.”
Here’s the problem. In describing the situation, the authors suggest that throwing a game in order to win the tournament is in principle no different from a lob shot in tennis, or going out slow in the 5000m run – a short term tactic in support of a long-term goal. Can you say, “the end justifies the means?”
I leave it to you, the readers. Can you spot the difference between a tennis lob shot and throwing an Olympic match? If so, congratulations – your ethical instincts are more intact than those whose profession is “competition economics.”
Bonus point: can you tell the difference between throwing a match at the Olympics and throwing the World Series? Me neither. Except that one is being “explained” in the Harvard Business Review as a case of misaligned incentives, and the other – quite properly – is considered the gold standard for sports scandals.
Would somebody please tell the economics profession that they’re missing a few letters in “ethics?” Particularly, the letters e, t, h, i, c and s.