One week after the suit was lodged, Samuelson penned the following statement: “It’s unclear whether the Securities and Exchange Commission can prevail over Goldman Sachs in court. Goldman’s legal obligations in this complex and contested transaction are murky. But whatever happens in court, the complaint against Goldman represents a watershed. It challenges a moral transformation on Wall Street…”
That ellipsis marks the end point of Samuelson’s perceptiveness, as far as I am concerned, and I shall discuss later the words that they excise. But the beginning of Samuelson’s column offers matter enough for preliminary reflection: In what sense does the Goldman Sachs case challenge a moral transformation on Wall Street?
According to Samuelson: “Once upon a time, Wall Street’s leaders saw themselves as arbiters of capital, helping allocate society’s savings to productive uses. By contrast, Wall Street’s major firms now see themselves as captains of ‘the market,’ navigating it—for themselves and sometimes their clients--for maximum gain. This is a distinction with a difference.”
I believe that Samuelson is correct, not only about Wall Street but about American capitalism generally—if one takes the first half of the twentieth century as the proper norm for capitalism.
The SEC's suit seeks to reverse the free-market, enterpreneurial, pro-individualist revolution that has transformed the U.S. economy during the last 50 years.
Under the restrictions enacted by Progressivist and New Deal legislation, companies in the early twentieth century no longer dared to use the market as their lodestar. In the infamous Alcoa case, for example, Judge Learned Hand laid down the principle that relentlessly pursuing market advantage could be illegal, if the results were not to the government’s liking. In response, big businessmen began to re-conceive the nature of their companies. Increasingly, they saw their firms as social institutions pursuing the public interest, which they defined as: Steady economic growth, produced by cautious investment, resulting in no major social dislocations. It was a very feudalistic conception of the economy, in which big businessmen took the role of dukes, acting on their own, but ultimately dedicated to serving the interest of the king’s realm (the nation).
During the same early twentieth-century era, of course, capitalists were being savaged by muckrakers as heartless economic slavemasters, an image they did not understand or relish. Led by John D. Rockefeller Jr.’s Special Conference Committee, which included many of the largest American corporations as members, industrialists began to reject their merely economic role as employers and to adopt programs of “welfare capitalism,” positioning themselves as seigneurial lords and benefactors. Again, it was a very medieval conception.
By the 1950s, these two pre-capitalist economic models had achieved considerable prominence in the United States, and they were sustained by a triangle of forces. Unionized labor helped to elect activist legislators, who in turn produced numerous economic regulations. Many of their regulations hemmed in corporate activity but not a few of them were directed at reducing competition against large corporations, both from foreign producers and from entrepreneurial upstarts. Given such protection from competition, large corporations were thus able to shower perquisites on their placid executives, unearned benefits on their inefficient labor forces, and largess on their worshipful communities.
Two factors helped to destroy this Iron Triangle. First was the economic profession’s growing understanding of markets, represented by the surprising award of Nobel Prizes to Friedrich von Hayek (1974) and Milton Friedman (1976). The result of this widespread appreciation of market forces was the emergence in the late 1970s of a Left/Libertarian political alliance in favor of de-regulation. Libertarians welcomed the efficiencies of open markets, while the Left welcomed competition’s dethronement of entrenched fat cats.
The second factor in breaking up the neo-medieval conception of business was Peter Drucker’s “age of discontinuity.” New technologies and new industries, mostly centered on the Information Age, began to reshape both the economy and the rising generation’s conception of how business and finance should operate. No longer did the best and brightest feel that they had to choose between a dull but prosperous forty-year climb up the corporate ladder on the one hand, and an exciting but underpaid life of scientific or mathematical research on the other. Increasingly, they expected to bring to business and finance the intensity of creative thought and the high-risk zest of youth—and, just maybe, become multimillionaires by the age of thirty-five.
What emerged from these two phenomena, I would argue, was the economic counterpart of the contemporaneous self-help movement. Like that movement, the rising fervor for open markets and for entrepreneurship produced a culturally acceptable language that validated the pursuit of self-interest.
But a generation has now passed since that transformation, and the Left (exemplified by Robert Samuelson) is beginning to learn that it was snookered by individualism. Yes, the entrepreneurship of new technologies and financial services embodies the kind of creative intellectual activity that the Left has always applauded as personally authentic. But capitalist entrepreneurship is essentially motivated by personal economic gain, which the Left has always despised. Yes, the deregulation of manufacturing and finance means cheaper goods and services for consumers, as well as the elimination of those paunchy Lords Bountiful who used to dominate American communities. But deregulation also means that companies are now guided by markets, not social concerns.
In short, what the Left has discovered is this: The decades-long revolution against 1950s business feudalism has led to an economy in which businesses and businessmen feel free to admit that they are out for themselves. And that is what Goldman Sachs has frankly admitted in the context of the SEC suit. Which is why Robert Samuelson is quite right to claim that the SEC’s suit challenges the moral transformation of Wall Street.
In the sentence that I cut off with ellipses, Samuelson wrote: “It [the SEC suit] challenges a moral transformation on Wall Street that has justified behavior that most people would regard as deceptive or dishonest.” His choice of words, I believe, reveals that the true source of his complaint is indeed free-market entrepreneurship.
The capitalist system bans the deception and dishonety called fraud, the essence of which is obtaining values from other people by causing them to misperceive the transactions they are undertaking. That is wrong, under capitalism, because the fraudster does not truly earn the value he obtains. By contrast, the free-market system extols the entrepreneur, who optimizes the creation of value precisely by perceiving the nature of transactions better than other people. To one who embraces the virtue of self-interest, fraud and entrepreneurship differ as night and day: the first involves deceit; the second, superior wisdom. But to the altruist, fraud and entrepreneurship are close kin: If an entrepreneur possesses superior wisdom, altruists believe, it is nearly as wrong for him not to share it with his trading partners as it would be for him to deceive them.
And here, ultimately, is the critical importance of the SEC’s suit against Goldman Sachs: It seeks to reverse the free-market, enterpreneurial, pro-individualist revolution that has transformed the U.S. economy during the last fifty years. The suit implies that, morally and legally, every businessman must be his brother’s keeper—his customer’s, supplier’s, stockholder’s, bondholder’s, neighbor’s, and fellow countryman’s keeper. Whatever one thinks of Goldman Sachs as a company, it is that implication of the suit that pro-capitalists should reject.