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Ethics on Wall Street: Hate the player, not the game

A recent survey on Wall Street ethics is no great cause for alarm.

A recent survey of Wall Street executives paints a bleak picture of the moral tone of a central part of our economic system.

According to the survey (conducted for Labaton Sucharow LLP), 24% of respondents believe that financial professionals need to engage in unethical behaviour in order to get ahead. Another 26% report having observed some form of wrongdoing, and 16% suggested that they would engage in insider trading if they thought they could get away with it.

Two points are worth making here.

First, some perspective. Far from alarming, I think the numbers produced by this survey are encouraging. Indeed, they are so encouraging that I can’t help but suspect respondents significantly underreported unethical attitudes and behaviour. Only 26% had seen something unethical? Seriously? That seems unlikely. And the fact that only 16% said they would engage in insider trading is also relatively benign. There are, after all, people who believe that insider trading isn’t unethical at all, and should be legal. They argue that insider trading just helps make public information that shouldn’t be private in the first place. I don’t think that point of view holds water, but the fact that it’s put forward with a straight face makes it pretty unsurprising that a small handful of Wall Street types are going to cling to the notion.

Second, a survey like this highlights the difference between our ethical evaluation of capitalists and our ethical evaluation of capitalism. One of the major virtues of the capitalist system is that it is supposed to be able to produce good outcomes even if participants aren’t always squeaky clean. In no way does it assume that all the players will be of the highest virtue. Adam Smith himself took a pretty dim view of businessmen. In The Wealth of Nations, Smith wrote: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”

And yet despite his dim view of capitalists, Smith remained a great fan of capitalism—or rather (since the term “capitalism” hadn’t been coined yet) a fan of what he referred to as “a system of natural liberty.” The lesson here is that evidence (such as it is) of low moral standards on Wall Street shouldn’t make us panic. Perhaps it should make us shrug, and say, “Such is human nature.”

The challenge is to devise systems that take the crooked timber of humanity and mould it in constructive ways. Governments need to take corporate motives as they are and devise regulations that encourage appropriate behaviour. And executives need to take the motives of their employees as they are and devise corporate structures—hierarchies, teams, incentive plans—that motivate those employees in constructive ways. In both cases, while the players should of course look inward at what motivates them, the rest of us should focus not on the players, but on the game.

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