Through the Eyes of Yankelovich

Ethical Confusion is the Main Obstacle

ALL the economies of the developed world are struggling to regain their old vitality. This is particularly true of the economies of Japan and the United States. Both look back nostalgically to an earlier era of steady growth, dynamism and social mobility, which both nations would dearly love to recreate.

In the post WWII era, both Japan and the United States embraced a “democracy-friendly” form of capitalism. This is the form of capitalism that achieves a close alignment between its profit-making institutions and the aspirations of the public to live a free and ever more prosperous life. In the consumer-driven economy of the United States from the end of WWII up to about 1980, the link between corporate profitability and social mobility was simple and direct. Then as now, two thirds of GDP depended on consumer spending, and the most direct way to increase corporate profits was to put more money in the hands of consumers to spend on profit- able products and services.

Japan’s economy was more export driven. It achieved its stunning success in those years through exporting to the United States and other nations products that were superior in design, quality and value for money. As a consequence, the Japanese people achieved a higher standard of living and an impressive rate of savings.

Gradually, however, in recent decades both the American and Japanese economies have become less democracy-friendly. And both have suffered as a result.

Capitalism and democracy do not coexist automatically and effortlessly. We have learned from China and other nations how flexible capitalism can be. It can take many forms and flourish under non-democratic governments. But democracy-friendly capitalism has proven to be the ideal form for safeguarding the public’s freedom and social mobility as well as enhancing the dynamism of the private sector.

Both Japan and the United States are finding it difficult to recreate their golden era. I am convinced, however, that it is achievable for both nations. If successful, it would constitute a huge win; it would raise public morale; business would regain the public trust it craves; and our political systems could once again be counted on to “do the right thing,” just as they had in earlier decades. Then our economies would achieve the higher levels of growth we need to sustain productivity and prosperity.

Let me not underestimate the difficulty of the task. It constitutes what is known as a “wicked problem.” A wicked problem is one where (i) understanding its causes does not suggest a practical solution, (ii) conventional fiscal and monetary economic policies don’t work as planned and (iii) genuine solutions depend on how the problem is framed.

Even though today’s world economy is vastly different from that of the post WWII era, I believe there is a way of framing the problem that will help to restore democracy-friendly capitalism to our two nations.

Our two economies began to stray away from democracy-friendly capitalism when companies learned how to be profitable without passing on their gains to employees or consumers. They did so by exporting jobs and using technology to reduce labor costs. American companies also discovered that they could avoid the costs of training employees. Instead, they delegated the task to the nation’s educators, who have proven poorly equipped to carry out this new responsibility.

The result: the stock market has thrived while labor market wages stagnated. The inequality gap between the top tier and all others grew ever wider. Social mobility for the great majority of the American public became brutally blocked–a condition that, unless corrected, threatens America’s social and political stability.

I propose that instead of rushing to apply economic remedies, we start by framing the problem through the lens of social ethics and culture. Culture is the place where the ethical standards of the society reside. It is, I would argue, the perversion of our own ethical traditions that is making it so difficult for our economies to find their way back to the democracy-friendly ideal.

Both Japan and the United States have their own pro- found ethical traditions. These may be their greatest strengths as civilizations. But ethics can be twisted into strange and alien shapes.

In the United States, the pernicious doctrine of share- holder value has distorted the nation’s ethical heritage. This is a doctrine that advances the perverse premise that our great corporations should put the interests of shareholders ahead of all other stakeholders: custom- ers, employees and the broader society.

“Stewardship doesn’t mean self-denial or self-sacrifce.”

For the interests of short-term traders and shareholders to take precedence over consumers, employees, citizens and the larger society is, of course, a clear travesty of democracy. And yet, it is today the dominant doctrine of the vast majority of America’s corporations.

This is a recent development that didn’t prevail until the 1980s. A TV interview several weeks ago with the former CEO of Medtronics (a medical device company) reminded me of the ethical stance of most American CEOs from the 1950s to the 1980s. His interview conveyed the message that if you want to build a great company, the customer and employee have to take priority over the shareholder. This is a blatant contradiction of shareholder value.

In Japan (and in many European countries), the ethical blurring takes a different form. These economies are struggling to cope with market rigidities that are a heritage of the past. These include banks with large hidden liabilities, non-competitive business practices, employees who must be retained even when they are no longer useful, discouragement of disruptive innovation, and great difficulty in launching new startups.

Abenomics in Japan is attempting to overcome these burdens of the past mainly through conventional economic policies. Two of its three “arrows” are aimed at fiscal and monetary policy. The third arrow, aimed at rigidities in the labor market, is having difficulty finding the target.

Japan’s ethical heritage makes it difficult to counter the accumulated privileges of so many influential sectors of society. Once an “entitlement” is in place, it is politically difficult to withdraw it. Doing so comes to be seen as “unethical,” even if the entitlement has destructive effects (as zombie banks clearly do).

My point is that it is almost impossible to launch successful economic reforms when the cultural ethics of the nation oppose them –even when these ethics are destructive and have been distorted out of shape.

When this happens, the task of leadership is to find ways to correct the distortions. Both Japan and the United States have a long heritage of the ethics of stewardship. Stewardship involves taking good and responsible care of people and institutions. It has both religious and secular connotations. Its goal is always to leave an institution in better shape.

One way to revive business stewardship in the United States is to reward the ethic that dominated CEO behavior before the 1980s. Up to that time, the main task of the CEO was to balance the competing claims of all stakeholders, and to avoid giving priority to any one group. In that era, large successful companies were reluctant to give priority to traders and short-term shareholders.

The most successful leaders in business, government, education and the professions have been those who lead their institutions with genuine stewardship.

Stewardship doesn’t mean self-denial or self-sacrifice. The two wealthiest men in the United States–multi-billionaires Bill Gates and Warren Buffet–personify and practice the ethic of stewardship.

In summary, if economic reforms are seen to violate a society’s social ethics, they are unlikely to succeed even when these ethics have been deliberately distorted. Confronting this obstacle must have priority if the reforms are to succeed. The best way to correct the distortions is to honor the ethic of stewardship. It is an ethic that keeps faith with both American and Japanese history and tradition. tj

The complete article can be found in Issue #276 of the Tokyo Journal. Click here to order from Amazon.