The Gulf Spill and the Hidden Vice of Capitalism

Here is one aspect of the Gulf spill no one seems to be talking about. It concerns the same thing that conservatives commentators, libertarian journals, and economists seldom take into consideration: Persons in the upper management of large corporations are not necessarily very intelligent and few are well-educated. That is the hidden vice of capitalism. For once, I am speaking as an expert. (Go ahead, check my vita linked to this blog and then, re-check the facts on Google. Make my day!)

The BP-caused oil spill – going on for more of a month as I write – is also a public relations disaster for the corporation. As I said earlier ( “The Louisiana Oil Disaster? Posted 5/21/10), we are still missing the moving photographs of thousands of dead, soiled aquatic birds. There is in and around Plaquemines parish a group of stake-holders that is becoming increasingly vocal: The fishermen. I heard some on NPR on 5/25/10 complaining that BP has mostly ignored their wishes to “volunteer” to help. It sounded true and it sounded incredible to me.

Whatever happens, BP is going to be on the hook for hundreds of millions of dollars, possibly for more than a billion dollars. The fishermen whose livelihood and whose future appears to be threatened by BP’s negligence number in the hundreds. I doubt that there are a thousand of them altogether. At the risk of sounding cynical, I will say that they are the only easily identifiable group of human victims who tug at ordinary Americans’ hearts. It’s easy to imagine that most Louisiana fishermen don’t have a doctorate in solar energy science, for instance; it’s easy to recognize that few can readily switch to another occupation. That they may want to transmit their legacy to their children is also understandable from an emotional standpoint. Finally, the tens of millions of American who fish recreationally will have no trouble grasping that the Louisiana fishermen may love their occupation and the lifestyle that goes with it. I am skeptical myself about the extensiveness of the damage. I don’t hope it will become Obama’s Katrina. Yet my heart goes out to those unknown fishermen deprived of both livelihood and, it seems right now, of a future.

That’s why I find it incomprehensible that BP has not taken the following simple measures: Gather everyone who claims to be a fisherman and is in a boat that moves under its own power. Give $100 a day to very crewman, $150 to every captain, and another $200 for the boat. I think the total cost would be under $200,000 a day or six million dollars for a month. And yes, there would be graft and cheating.

BP could simply tell the fishermen that they are “on call,” to be deployed at four hours’ notice as needed. Almost all would cooperate because the urge to do something in a crisis is irresistible. The shirkers would not be missed and they would be shunned by their neighbors. Tempers would subside. The locals would be turned from louder and louder claimants enjoying the world’s sympathy into allies of BP.

Why does not BP do anything so simple, you wonder? Back to my opening comments. The upper levels of big corporations are replete with people with mediocre minds. That this is not well-known is the fault of ignorant journalists and of devious business schools. (Disclosure: I taught in a business school for more than twenty years.) In fact, the evidence that CEOs of big corporations, for example, do anything that is both useful and important is slim and ill-founded. I mean by the latter that the empirical evidence in support does not begin to reach the level of rigor expected in the social sciences in general. The quality of the evidence does not even come close to what one expect routinely in the social sciences that concern themselves with business specifically. I know this because I refereed for such journals and submitted my own research to them for thirty years. ( There is a column on the technical topic of scholarly refereeing somewhere on this blog.) Warning: I stopped taking interest in that kind of research about three years ago. If some great, well-executed study has appeared on the topic since then, I might not know of it. If you know of one such, please, let me know that I may correct my ignorance. In summary” The myth of the god-like captain of industry prevails. It prevails without much successful challenge because it’s a myth, precisely, the founding myth of capitalism.

How can such a disturbing, dismal view of corporate governance be correct? There are two, explanations; they are not mutually exclusive; in fact, they overlap. First, academics in general don’t receive well innovations that may undermine scholarly reputations built over a life-time. There is some good in this because many innovations are, in fact, frivolous, the products of passing fads. Yet, scholarly innovations with impeccable credentials, the very credentials the fortress defenders claim to respect, also have difficulty gaining a foothold. Frequently, when they do gain a foothold, they are restricted to a ghetto for a generation or more. Evidence in favor of the idea that CEOs are omniscient and omnipotent need not exist. Any evidence that they are not is guilty until it proves itself innocent, over and over again.

The second explanation is crass: Most or all business schools derive a significant fraction of their revenue from private donations and endowments. Donations, other than bequeaths by the dead, are always decided on or reviewed by CEOs or by their creatures. The unspoken consensus in business schools is that there is no need to bite the hand that feeds you, even if it feeds you only dessert. Why antagonize the people with wallets in hand with research and publications that minimize their importance and suggest they may not be all that bright? This state of mind does not result from any conspiracy. It needs not be expressed. It’s part of the culture of business schools. In support of this thesis is the well-known fact that the richest business schools turn out the most iconoclastic research Stanford University comes to mind where the mindset goes like this: You want to bequeath us what? Thank you, we are busy right now. If you can call tomorrow, we will try to find you a spot in the line of donors.

Its’ chic nowadays to downplay the relevance of academia and academia has done much to earn this contempt. The fact however is that business schools teach vast numbers of undergraduates, and only slightly smaller numbers of MBA students. They instruct ordinary people, journalists, teachers and teaches of teachers. Almost anything anyone in America knows about business come from or is heavily influenced by this teaching. What business schools teach matters in the long run although in diffuse ways.

While it might be used that way, this short essay is not an argument for government intervention or supervision. The perception that government bureaucrats know anything at all is even more questionable. After all, they have been running the US Post Office for 230 years!