Dear FLOW Members,

Recent events in the financial, banking, and insurance industry frustrate our sense of justice and goodness because it is certain that, no matter what else happens, some individuals who have made harmful decisions have become very wealthy precisely by means of making those harmful decisions.  We would all prefer a world in which the long-term value that one contributes to the well-being of humanity was highly correlated with the wealth, power, and respect one received in this world.

In a small community, it was much easier to determine who contributed what to the community.  It was easy to see which hunter brought in the most meat, or who worked the hardest in building shelters.  When someone cheated it was quickly recognized, and punished harshly.  There is abundant evidence from evolutionary psychology, from anthropological studies of indigenous tribes, and from psychological experiments, that those of us who contribute most to the well-being of a group are the most punitive to those who do not contribute to the well-being of the group.  There is a sense in which it is bred into our DNA that those of us who are good are most eager to punish those who are bad.

How can we determine what is good in such a complex world?  Jonas Salk, discoverer of the polio vaccine, once proposed the simple criterion that “If it is good for children, it is good.”  While that criterion does not resolve all moral problems, it is a fairly useful rough and ready criterion through which to cut through the world’s massive moral complexity.  Certainly for myself a clear implication of the Golden Rule, “Do unto others as you would have them do unto you” requires that I devote my life to helping children, because I know that if my child were at risk of harm I would want everyone to do everything possible to prevent that harm.

So how do we help as many children as possible on earth?  For me, it is important that the impulse that some of us have to do good does not make us more focused on punishing than on continuing to make the world a better place for children.  The recent financial debacle has unleashed a tremendous wave of punitive rhetoric towards capitalism and markets that, if followed to its logical conclusion, will be harmful towards the world’s children.

As the headlines rolled in over the past month, I’ve received countless communications from people who regard contemporary events as vindication of their long-standing belief that “unfettered” capitalism is a bad thing.  And, of course, the fact that unscrupulous individuals have made immense fortunes while causing great harm to the economy is, indeed, a bad thing.  But if we care about improving the lives of the world’s children, there are a number of key intellectual distinctions that must be made.  This is a clear-cut case in which intellectually irresponsible statements can result in profound long-term damage to billions of human beings.

Before identifying the prospective harms that may result from thoughtless punitive rhetoric, it is helpful to be clear about the most serious source of the financial collapse and the most important positive step going forward:  Fannie Mae and Freddie Mac, as government-sponsored entities subject to direct political pressure and insulated from real market forces, represent an enormous ground zero of the entire problem.  As economist Arnold Kling, who worked for Freddie Mac for ten years, writes “The Fannie Mae-Freddie Mac crisis may have been the most avoidable financial criss in history.”  Freddie Mac's Chief Risk Officer expressed concerns in mid-2004 to Mr. Syron, the CEO of Freddie Mac, leading to his being fired in 2005,

In an interview, Freddie Mac's former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that "would likely pose an enormous financial and reputational risk to the company and the country."


This is but one of countless alarms that went off early on, but it was a particular important one, coming from the Chief Risk Officer at an organization that, together with Fannie Mae, control about 90% of the nation’s secondary mortgage market.  The single most urgent action to prevent another collapse of this nature would be to privatize Fannie Mae and Freddie Mac so that we are not subject to such a massive case of moral hazard again.  For more nuanced analyses of the financial collapse, see Stan Liebowitz, “Anatomy of a Train Wreck:  Causes of the Mortgage Meltdown,” , Arnold Kling, “Freddie Mae and Fannie Mae:  An Exit Strategy for the Taxpayer,” , and Stephen Horwitz, “An Open Letter to My Friends on the Left”. 

But here my primary concern is not the debate over who is responsible for what, nor the details regarding exactly what plans are best going forward.  There are numerous legitimate parties to blame, and there will be endless debate over appropriate action going forward.  There are two things we should not lose sight of regardless of which of these accounts prove most persuasive in the months and years to come:

1.  The developing world remains poor because it remains massively over-regulated.

2.  New innovations that will improve our ability to align authentic value creation with wealth will doubtless require further more market freedoms.

These two propositions do not imply that all financial regulations in the coming months and years are wrong-headed; for instance, there is a very strong case to be made that as long as Fannie Mae and Freddie Mac remained government-sponsored enterprises, they should have had better regulatory oversight.  But it does imply that simplistic partisan approaches to the role of government in the economy should be resisted.

With respect to over-regulation in the developing world, see the Fraser Economic Freedom of the World report’s analysis of business regulation and credit market regulation around the world.  The five nations that regulate business the least are:

1.  Iceland
2.  Finland
3.  Singapore
4.  Hong Kong
5.  Denmark

The five nations that regulate business the most (of those rated; North Korea, Cuba, and a few others are not rated):

135.  Angola
136.  Zimbabwe
137.  Democratic Republic of Congo
138.  Cameroon
139.  Venezuela

With respect to credit market regulation, it is worth noting that the U.S. has the 23rd most heavily regulated credit market in the world, behind the credit markets of Denmark, Norway, Finland, Iceland, Australia, the U.K., New Zealand, and others.  The most heavily regulated credit markets include the two Congos, Chad, Ethiopia, and Zimbabwe.

While there has certainly been some deregulation in the financial sector, on balance there has been an increase in regulation in the financial sector in recent years.  Tyler Cowen notes that U.S. government regulatory expenditures on finance and banking increased 42.5 percent from 1990 to 2008, with the proposed 2009 budget, which was crafted well before the collapse, proposing an increase in regulatory budget of 6.4%, consistent with the long term trend.

More surprising to many is the fact that the U.S. is one of only a handful of nations that have less economic freedom now than in 1980.  Our economic freedom score did, indeed, increase from 1980 up to the year 2000, when it peaked after eight years of Clinton.  It has decreased under Bush, however, such that we now have less economic freedom today than we did when Jimmy Carter left office in 1980. As most of the world has become far more free market since 1980, the U.S., along with Myanmar, Venezuela, and Zimbabwe, and a few others, has become less free market. 

The increase in economic freedom in China, India, Chile, Ireland, Estonia, and elsewhere has brought hundreds of millions of human beings out of poverty in the past thirty years, and has allowed tens of millions of children to live who might otherwise have died.  Based on Salk’s simple, straightforward moral compass, that what is good for children is good, the increase in economic freedom around the world in recent years is one of the greatest of moral goods the world has ever seen.  Based on my criteria that, as a parent, I would urgently want people to help me if my children were in danger of being harmed, every individual who promoted greater economic freedom around the world for the past fifty years is a moral hero to hundreds of millions of parents.

I don’t have space here to elaborate on the importance of market freedoms to promote innovations.  But in our personal moral calculus of what should be allowed and what shouldn’t be allowed, we must always remember to include the benefits, in perpetuity, of new innovations.  For those of us who care about long-term well-being, and who believe in the power of creativity, innovation, and entrepreneurship to better the human condition, it is worth studying our options well to know how to solve critical problems in a manner that increases opportunities for innovation rather than shutting them down.

Towards peace, prosperity, happiness, and well-being for all,

Michael

Dear FLOW,

I’ve just returned from two weeks in Senegal, a beautiful land with a tolerant Islamic culture, mostly Sufi, a very strong work ethic, an indigenous entrepreneurial tradition, and an HIV/AIDS rate that is among the lowest in Africa, nearly as low as the current U.S. rate.

Senegal’s political history is also unusually positive:  The first president of Senegal, Leopold Senghor, was a star student throughout his academic career in France, becoming a renowned teacher and then an illustrious poet.  His poems have permanently entered the French language canon of great poetry.  In the 1960s and 70s, as it became apparent that many African leaders were vicious thugs, Senghor was at times the only African leader to speak out against the atrocities being committed by his fellow African heads of state.  Though a socialist, he thoroughly repudiated the communist party, and consistently worked throughout his life for a democratic socialism in Senegal. 

Yet Senegal today, despite being one of the only African nations to have experienced neither coup nor war since independence, has a U.N. Human Development Index rating lower than Haiti, the lowest ranked nation in the western hemisphere. Senegal’s GDP per capita has been stagnant since independence in 1960, despite billions in aid (Senegal has been one of the top recipients of foreign aid in Africa for decades) and the ongoing presence of countless NGOs.  Despite the natural beauty of Senegal, Dakar itself consists largely of miles and miles of poor, filthy neighborhoods in which malnourished children catch malaria, dysentery, and other diseases.  How can a nation so favored remain so poor?

Magatte Wade-Marchand is a Senegalese entrepreneur who founded Adina for Life, a beverage company based in San Francisco.  She found that when she had returned to Senegal after living in the U.S., people were increasingly drinking Coke rather than the traditional hibiscus beverage of her childhood.  She knew that the Senegalese would never return to their traditional beverage unless it became respected in the developed world, so she created Adina (which means “Life” in Wolof, the dominant indigenous language of Senegal) to market the traditional hibiscus drink in the U.S.  Adina today is a multi-million company that just received its third round of investment capital; it is carried by Whole Foods Market, Wegmans, and other upscale and natural foods grocery chains.

Magatte has turned most of over her day-to-day management tasks of Adina to professional managers and is now transitioning to work primarily on the Diama Foundation (Diama means peace in Wolof), dedicated to helping women entrepreneurs in Senegal.  But Magatte’s aspirations go way beyond microfinance; she aspires to help other women entrepreneurs in Senegal develop the expertise and professionalism to bring their products to markets in the U.S. and Europe.  As someone who has herself gone through the work of creating a supply chain in Senegal that meets not only U.S. quality health standards, but also global organic and Fair Trade certification standards, she knows exactly what it takes to train indigenous Sengalese to meet global standards.  Moreover, on the branding and marketing side she is acutely aware that in order to obtain the high value added prices that are associated with organic and Fair Trade products, it is critical to develop a compelling and sophisticated brand identity.  She cringes when she observes the current lack of brand sophistication prevalent in Senegal.

One of the things that fascinates me about entrepreneurs is the way that they are capable of seeing opportunities that are invisible to most people.  Magatte is a brilliant visionary entrepreneur in this sense:  as she travels through Senegal she sees countless entrepreneurial opportunities waiting to be developed.  In each case, she is brutally critical of existing Senegalese standards of customer service, professionalism, cleanliness, consistency, etc.  But she also knows, as an entrepreneur, that it is possible to identify good employees, train them, and reward those who perform good work.  And thus she sees each entrepreneurial opportunity as simply a matter of work:  On the Senegalese side, create the production system and train the employees to perform at world-class standards while simultaneously developing branding, marketing, and distributional channels in the U.S. through which the new products may be sold.  In addition to Adina, she has already developed a few additional small product lines based on these principles, and as far as I can tell she is likely to be able to create, and help others to create, any number of successful Senegalese businesses that will be able to sell products in the U.S. and Europe, ultimately creating tens of thousands of good jobs that cumulatively will alleviate the grinding poverty in which so many Senegalese live.

But if it is so easy for Magatte to do this, why haven’t others done it?  First, I should be clear, the fact that she has done it doesn’t mean that it is easy.  Her criticisms of existing Senegalese standards are apt, and the identification and training of good employees is a non-trivial task.  Magatte has a great eye for talent, an iron will, is uncompromising in her demand for excellence, and is willing to do whatever it takes to get people to perform at their best.  Not everyone has these characteristics; not everyone can succeed at training local people to produce to world-class standards.

In addition, Magatte has been blessed with an unusual entrepreneurial education.  When I first met her, I thought that thinking like an entrepreneur simply came naturally to her.  But upon questioning, she acknowledged that she had not thought like that at the age of 16, nor had she thought like that upon taking her first corporate job at the age of 22.  Clearly she had learned something in the world since graduation.

It turns out that her husband had been an entrepreneur whom she watched create his company from scratch.  She then worked in Silicon Valley for a headhunter during the late 1990s Silicon Valley boom, putting her in close contact with many dozens of dynamic entrepreneurs in the middle of starting up companies for several years.  She then worked as Sponsorship Chair for the MIT/Stanford Venture Lab, where she was responsible for helping leading tech corporations, venture capitalists, and high net worth individuals searching for outstanding startup opportunities to support.  She learned entrepreneurship by working smack dab in the middle of the world’s greatest entrepreneurial region, responsible for looking closely at the guts of entrepreneurial start-ups.

One of my enduring themes is that conventional education is 12 years of training in passivity and dependence.  In most schools, all day, every day, a teacher tells you what to do, when you can do it, and whether or not you have done it well.  There are, it is true, some individuals who maintain a sense of initiative and independent thought despite this process; but as someone who has spent much of my adult life training secondary students to think for themselves rather than parroting the teacher, it is my sense that the deadening effect of schooling is difficult to overestimate.  Insofar as one values entrepreneurial initiative, it is not at all clear to me that conventional mass education (beyond basic literacy and numeracy) necessarily adds value.  Insofar as it deadens initiative and deepens passivity, it may be a net harm.

The way in which education in Senegal has become an extended version of French colonial education is even more deadening.  There is a sense that some foreign curriculum which one is supposed to master will provide this mysterious “education” that is supposed to be valuable.  The Senegalese government is so committed to education that it spends 30-40% of the budget on education, and yet there is almost no private sector at all in Senegal.  Almost all jobs in Senegal are either government jobs or “informal sector” jobs, which in Senegal typically means very poor people struggling to make ends meet.  There are a few multinational corporations in Senegal, which hire a relatively small percentage of Senegalese, and then there is a very small indigenous Senegalese private sector.

How can a country of 12 million have so little real business?

To an entrepreneur, one of the most obvious of truths is that entrepreneurs create value.  Entrepreneurs like Magatte see flowers growing wild (Hibiscus) that Senegalese take for granted and launches a multi-million dollar business (when I told some Senegalese students that Magatte had created a successful company that began by selling hibiscus drink, their jaws dropped with wonder – it was simply unimaginable to them).  With secure property rights (including secure intellectual property – Magatte is acutely aware that brands are valuable if and only if you can defend their IP) and fair contract enforcement, entrepreneurs create value where none existed before.  This is one of the most fundamental and obvious truths of the economics of wealth creation, and was widely recognized in Britain and the U.S. throughout the 19th century.

And yet Senghor, who was a good humanitarian, had the misfortune to be educated in a French humanistic tradition that produced great poets but poor economists.  He launched an independent Senegal with a socialistic vision in which government had responsibilities to the poor and in which the private sector was a suspect force at best.  By the time Senghor left power in 1980, Senegal had less economic freedom than does Venezuela under Chavez today.  Senghor’s “democratic socialism” resulted in a Senegal that would have ranked 135th (out of 141 nations ranked today) on the Fraser Economic Freedom Index.  Socialists ruled Senegal from 1960 to 2000, when for the first time since independence Senegal elected a market-oriented leader, Abdoulaye Wade.

Wade is a courageous classical liberal lawyer and economist who had spent twenty-six years in political opposition to the socialists, including being repeatedly thrown into prison.  He was the only African leader to criticize Mugabe’s theft of the 2002 Zimbabwe election.  As a Muslim leader of a Muslim country, he has been a tireless international campaigner against violent Jihad, against Islamic fundamentalism, and for a tolerant, forward-looking Islam that supports modernity.  He has criticized the U.N. Food and Agriculture organization as “a bottomless pit of money largely spent on its own functioning with very little effective operations on the ground.”  He is a bold, outspoken, and independently-minded political leader.

And yet Wade has not been able to create a prosperous Senegal in the eight years since he came to power. It will take time to recover from forty years of socialism.  Only since Wade has come to power has Senegal’s economic freedom ranking exceeded that of Sweden’s in the 1970s, when government control of the economy peaked in Sweden.  And, of course, Sweden today is more free market than any nation in Africa, including Wade’s Senegal.  From 1900 to 1950, the period in which Sweden became wealthy, the Swedish government was smaller than the U.S. government at the time, which of course was much smaller than the U.S. government today.  What fans of Swedish democratic socialism don’t realize is that the Sweden that moved rapidly from poverty to wealth in the first half of the 20th century was more free market than is Hong Kong today, the nation at the top of the economic freedom rankings.

In 1960, Africa had a higher GDP per capita than did Asia.  But then General MacArthur’s market-based Japan took off, Hong Kong and Singapore became the most free market regimes in the world, South Korea and Taiwan opened up free zones.  In the 1980s China began creating free zones modeled on Hong Kong along its eastern coast.  And finally India switched from socialism to capitalism in the 1980s and 90s.  Now Japan and the four Asian Tigers are part of the developed world, China will reach a U.S. standard of living around 2030 and India will do the same around 2050.

Given economic freedom, entrepreneurs create value, and the resulting wealth benefits all.  Millions of Senegalese children are living in sewage and squalor today because Senghor, a caring intellectual with great integrity, did not understand this.

The Senegalese people are tolerant, kind, hard-working, and caring.  It is sad to see so many children suffering in the streets.  May the next generation of intellectuals, poets and all, understand the elementary principles of entrepreneurial value creation.

Peace,

Michael

An excellent NYT column by Tyler Cowan on the recent financial meltdown shows that deregulation is not at all the cause of the recent meltdown:

Still, the Bush administration’s many critiques of regulation are belied by the numbers, which demonstrate a strong interest in continued and, indeed, expanded regulation. This is the lesson of a recent study, “Regulatory Agency Spending Reaches New Height,” by Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University, and Melinda Warren, director of the Weidenbaum Center Forum at Washington University. (Disclosure: Ms. de Rugy’s participation in this study was under my supervision.) For the proposed 2009 fiscal budget, spending by regulatory agencies is to grow by 6.4 percent, similar to the growth rate for last year, and continuing a long-term expansionary trend.

For the regulatory category of finance and banking, inflation-adjusted expenditures have risen 43.5 percent from 1990 to 2008. It is not unusual for the Federal Register to publish 70,000 or more pages of new regulations each year.

This snapshot of the ongoing growth of regulation in the financial and banking sector is consistent with other long-run trends, including the fact that based on the Fraser Economic Freedom of the World rankings, the U.S. is one of only eleven nations that have less economic freedom now than in 1980.  Among the others that have declined in economic freedom are Venezuela and Zimbabwe.  Our economic freedom ranking peaked at 8.55 in 2000, after eight years of Clinton, and has been steadily declining throughout the Bush administration.  This year the U.S. is tied for eighth place on the rankings, with both Chile and Canada being ranked as more "free market" than is the U.S.

Tyler's article shows that bad regulation and subsidies is the real cause of the meltdown, and that much of the regulation actually made the problem worse.  Well worth reading in its entirety.

And, of course, I always recommend reviewing the Economic Freedom of the World rankings.

This article is one of an increasing number pointing to ways in which insurance companies are beginning to focus on the benefits of wellness.  The challenge is that company-sponsored wellness programs will be limited in the depth of their impact, because most employees only stay with an organization for a few years, and the benefits of wellness practices may take decades to reveal themselves.

It makes more sense for personal insurance to provide lower fees for those with good wellness habits, just as they do for non-smoking.  The fact that they are not doing so in a large way leads me to suspect that there are legal obstacles to the provision of such wellness-based insurance.  One of the biggest challenges to wellness insurance would be any racial disparities that might show up - if there are wellness practices that are correlated with race, then insurance that rewarded those who participated in wellness practices would penalize those who did not participate in wellness practices.  And if those penalized happened to be disproportionately of one race rather than another, the insurance might be ruled discriminatory and thus illegal.

The best hope around this dilemma is to focus on objective data showing correlations between specific wellness practices and health.  Better yet, it might be necessary to periodically monitor blood sugar, cholesterol, and other objective medical measurements in order to ensure that there existed objective medical evidence that those receiving discounts were indeed less likely to get chronic diseases.  This is similar to Progressive Insurance's voluntary monitoring of driving practices through the installation of a GPS in the driver's car.

More deeply, a change in attitudes around personal health responsibility, personal habits, and our role in diet and exercise would have to be accepted by our legal system.  Unfortunately, the concept of personal responsibility has been steadily eroding in our legal system for nearly 100 years.

There is a good article in U.S. News & World Report on Peter Barnes' Cap and Dividend proposal.  It differs from the existing proposed Lieberman-Warner proposal to Cap and Trade carbon emissions credits in that with Lieberman-Warner the energy companies are simply given carbon credits and then they trade them, whereas in Cap and Dividend a portion of the cost of the credits is returned to citizens as a dividend check each year.  There are estimates that a family of four would receive a check between $1,200 and $4,000 each year.  This would hellp compensate for higher energy prices; indeed, low energy users would come out ahead.

Moreover, the European system has been a disaster; it has increased energy costs while not reducing emissions and still giving energy companies unearned windfalls from a poorly designed government program - the worst of all possible worlds.

More importantly, Barnes comes out expicitly against incentives for clean energy or government programs "investing" in clean energy:

But in this system, you give the money to consumers instead of investing it in research on energy from sources other than fossil fuels.

I'm a retired businessman, and I believe obviously we need huge amounts of investments in new technologies and conservation and energy efficiency. But that's mostly going to happen in the private sector. It's not so much that we need public investments. We need to send a signal to the market to make the right investments. The market makes plenty of investments now, but they're the wrong investments.

This is exactly right; it should be considered Econ 101.  The government is incompetent to pick winners, but if you get the price signals right, then the private sector will discover what kinds of energy are worth investing in. 

I have a mild preference for Gore's proposal to exchange payroll taxes for carbon taxes, partly because economists I trust believe a tax approach would be less subject to abuse than cap and dividend, and partly because the payroll tax has rightly been described as "the worst tax."

That said, it is great to see Peter Barnes come out with such clarity on the issue of private investors directing investment dollars in the right direction once the price signals are corrected.  Quite aside from concerns about global warming, it has always seemed to me that dependence on foreign oil leads to a justification for a costly military and undesirable military intervention.

For those who are not already familiar with property rights solutions to tragedy of the commons problems, I recommend Barnes' Capitalism 3.0, a free download here.

The Congo Civil War, the most lethal war since WW II, has dragged on for a decade now.  War is always horrible, and often accompanied by the most brutal rapes.  For some years now graphic accounts of the most sadistic gang rapes imaginable have been pouring forth from the Congo.  For a relatively tame account from the New York Times, see this.  For far more horrifying accounts, simply Google "Congo" "gang rape" and read for as long as you can stomach it.

Yesterday I was standing in a kitchen listening to a debate about what type of water bottle was most environmentally friendly, with the advantages of different types of plastic and metal bottles compared.  The conversation was morally earnest, as if using one bottle vs. another might make a significant difference in one's personal health or the state of the global environment.

The day before, I was given a necklace made by Lovetta Conto, a 15 year old Liberian civil war orphan, from bullet casings left after the seventeen year civil war.  I met  Lovetta a few weeks ago, a lively, intelligent, dynamic, entrepreneurial young women.  Wearing the necklace each day provides me with a very powerful reminder of the reality of those who face bullets and for whom violent death is very much a part of their lives.  It is hard to focus on the advantages of aluminum water bottles when bullets are flying.

One of the projects we are working on is rebuilding the Liberian economy.  There are large numbers of unemployed young men.  Although the peace seems to be stable, violence could erupt again, and Liberia could collapse back into war.

The U.N. is ineffective at stopping the violence in the Congo.  No one really wants the U.S. to invade, and the U.S. wouldn't invade in any case.  So more millions continue to die, and more millions of women continue to experience the most horribly violent degradation imaginable.

I wish more people would focus on pro-actively providing a foundation for peace.  Once war has broken out it is very difficult to create peace.  But in places such as Liberia, Nepal, Afghanistan, and the Philippines, there are situations in which the creation of jobs and a healthy economy could make all the difference in the world between a collapse into violence vs. the beginnings of a stable peace.  We have contacts in all four locations working on creating Peace through Commerce, and on Accelerating Women Entrepreneurs.  Let us know if you would like to help.

An upcoming talk at Stanford; a marvelous validation of the core concerns of our Accelerating Women Entrepreneurs (AWE) program as well as all the focus on De Soto, North, the Doing Business rankings, U.N. Commisson on the Legal Empowerment of the Poor, and Economic Freedom Indices:

Laws, Liberty, and Livelihood: 
The Need for a Bottom Up Agenda of Economic Reforms

Madhu Purnima Kishwar is a Senior Fellow at the Centre for the Study of Developing Societies in Delhi. She is also the Founder President of Manushi Sangathan, an organisation committed to strengthening democratic rights and women's rights in India. She is the founder editor of Manushi - A Journal About Women and Society, which has been published continuously since 1978.


This presentation will focus on the absurd laws and regulations governing the livelihoods of two of the most visible and numerically large groups of urban self-employed poor--street vendors and cycle rickshaw pullers--showing how needless bureaucratic controls trap the hard working poor in a web of illegality and make them victims of extortion rackets.


While political theorists in India have engaged extensively with the need for greater political rights and freedom, far less attention has been paid to economic freedom. Political freedom has been understood very narrowly. Economic issues have been viewed largely through the prism of class struggle, with the state being projected as the sole 'protector' of the weak and vulnerable sections of society from the greed and exploitation of the rich and powerful. Neither our economists nor our political theorists have come to grips with the often predatory role of the State and how it works to wreck people's livelihoods and self-confidence. Obsessed with the political and electoral dimensions of democracy, our intellectuals and media tend to ignore the systematic and routine loot, extortion, violence, and indignities suffered by our people as they go about legitimate economic pursuits. The livelihood concerns of the vast majority of our people remain marginalized as even the agenda of economic reforms is focused on transnational corporations, the Indian corporate sector, and government-run public enterprises. Indian and foreign corporations and the PSUs together provide employment to no more than 3% cent of our population. As against about 10% who are self-employed in Europe and America, more than 90% of people in India work in the unorganized and self-employed sector.

Sunday, April 20, 2008, 3 p.m.
Building 200, Room 219


Map: http://campus-map.stanford.edu/index.cfm?ID=01-200

Dear FLOW Members,

Human beings evolved the cognitive and moral capacities needed to make
the judgments needed to survive in small tribes of 150 or so.  Given
the limitations of our cognitive and moral judgments, it is truly
extraordinary how we have extended our lifetimes several times over
and created a world in which the death of an infant has become rare
rather than typical.  But our path to the luxury of children who
typically live, rather than die, and who typically grow to an old age
has not been an easy one, nor will it be easy to continue to improve
human life around the world.

One of the primary challenges we face in creating a world of
widespread peace and abundance, is overcoming the hatred many people
feel towards the free enterprise system, or "capitalism," as the free
enterprise system is referred to by its critics and enemies. If we are
to dramatically reduce global poverty and war we need to re-vision and
re-brand capitalism.  In order to do so, those of us who seek to
create a new identity for capitalism need to identify those elements
of capitalism that are intrinsically virtuous while also admitting
those elements of capitalist practice which are, in fact, vicious,
much as the critics believe.  We also need to create and support ever
more virtuous manifestations of capitalism while also fighting the
deep-set bigotries against capitalism that prevail in so many
quarters.

John Mackey's preferred expression to represent the ever more virtuous
manifestations of capitalism is "Conscious Capitalism."  His two
criteria for the practice of Conscious Capitalism are:

• That it be based on a deeper purpose than profit maximization.
• That it understands the interdependent relationships between all stakeholders in the enterprise, including shareholders, employees, suppliers, customers, communities, and the environment, and addresses the interests of each and the relationships between the stakeholders to optimize the enterprise system for the highest good for all.

I won't add to his discussion of the stakeholder model at present, but
with respect to deeper purpose, John makes the sensible point that the
creation and management of enterprises ought to be regarded as a
profession, with ethical standards and lofty aspirations, so that we
understand the nobility of enterprising much as we understand the
nobility of law, or medicine, or education.  This is not to deny that
sometimes businesspersons, or lawyers, or doctors, or educators are
sleazy or unworthy individuals.  Some are, some always have been, and
some always will be.  But those who limit "capitalism" to a mechanical
notion of "profit maximization" are unfairly denying the nobility of
the nature, effects, and intentions of many in the business world.
Worse yet, by claiming that "capitalism" is somehow intended to be no
more than "profit maximization," they thereby encourage and support
those who are either mindless or vicious in the business world.

Moral purpose is an essential feature of human nature.  In the tribal
environment, it was crucial to survival that each member of the tribe
supports the norms of the tribe, which were often manifested in a
moral and cosmic order integral to the beliefs and identity of the
tribe.  Beyond loyalty to the customs and the gods worshiped by
individuals in the tribe, tribal leaders needed to exemplify support
for and commitment to the customs and the gods.  Contrariwise, tribes
disciplined those who failed to adequately support the cultural
integrity of the tribe by means of social disapproval as well as
harsher sanctions, ultimately including banishment or death. The code:
"Good people support the moral purposes of the tribe" has been bred
into us through its utility to tribal survival over millions of years.
 It isn't smart to ignore Mother Nature.

Indeed, despite the extraordinary diversity of recorded human history,
until the 19th century the centrality of moral purpose to human life
was self-evident.  There were many villains and criminals, but
typically even they claimed some higher purpose for their crimes.
Only in late 19th century Europe do we find a widespread decline in
belief in moral purpose among certain intellectuals, even a dogmatic
belief that the most advanced scientific thinking - sometimes regarded
as Marx, Darwin, and Freud - had shown that moral belief was a
delusion.  The evolutionary psychologists have shown (as did Darwin)
that the hunger for moral purpose is as real as is the hunger for
food.  And just as our evolutionarily optimized appetite for food
leads us to eat fats and sugars that are not good for us today, our
appetites for moral purpose have sometimes led us into dangerous moral
diets.

Just when the timeless belief in moral purpose was fading among some
intellectuals, there were violent conflicts between workers' unions,
on the one hand, and business leaders, on the other.  These conflicts
were exploited by intellectuals starved for meaning who believed that
they could create a better world through violent revolutions leading
to an idyllic Marxist communism.  By the 1920s the Marxists had taken
the moral high ground at many universities around the world.  While
there continued to be many noble business leaders who continued to
create and manage companies based on a deeper purpose, by the early
20th century almost no intellectuals were willing to defend them.
Anti-capitalist moral righteousness intimidated all but a very few
defenders of free enterprise into silence.  By the late 1930s, the few
remaining defenders had been effectively marginalized.

Rather than defend the moral purposefulness of free enterprise, as
classical political economy had done, neo-classical economics withdrew
into mathematical formalism and developed the notion that corporations
"maximized profits," an amoral but mathematically convenient notion
that was completely alien to the classical political economy of Adam
Smith and J.S. Mill.  And thus during a period in which we most needed
a moral theory and practice of capitalism, moral perspectives on free
enterprise almost completely vanished from the realm of ideas.  The
universities, widely believed to be temples of learning for the sake
of human advancement, often advanced Marxism, the most lethal moral
ideal the world had yet seen.  Our appetite for moral purpose had led
us grievously astray.

Ironically it was during this period in which defenders of capitalism
based on moral purpose were most needed that our business schools were
founded, almost all of which taught that profit maximization was the
goal of businesses, and which attempted to provide "scientific"
methods for maximizing profits.  This is not to disparage the
excellent technical analyses which have been developed through schools
of business that have, in fact, been very useful.  But it was not
necessary to neglect the moral dimension of business, and it is a
tragedy that it was so neglected.  Thus it came to pass that those
temples of learning were simultaneously advocating destructive
anti-capitalist ideas as well as destructive capitalist ideas based on
the notion that corporations are no more than machines for maximizing
profits.

In response to the generations who have been taught the mistaken
notion of "capitalism as amoral profit maximizer," we have seen an
increase in interest in making business more moral.  Unfortunately, in
the form of Corporate Social Responsibility (CSR) the primary
perspective has been that of the anti-capitalists:  Business is often
perceived as intrinsically guilty, and CSR campaigners sometimes
regard themselves as self-appointed moral police force out to force
business to be moral according to their beliefs.  Again, this is not
to disparage all CSR campaigners, who have often won important
campaigns that have, in fact, made moral improvements in the
functioning of capitalism.  But just as amoral "profit maximization"
was not an ideal, so to the notion that business is ipso facto guilty
is also not an ideal.  It is not true, and the notion of business as
"guilty until proven innocent" will never mobilize a generation to
utilize capitalism to transform the world for the better.

The moral purpose of capitalism has been largely asleep for a hundred
years.  It is time for capitalism to wake up, and become conscious,
more conscious than it has ever been before.  Many of the great
entrepreneurs and inventors of the past - Thomas Edison, Henry Ford,
Alexander Graham Bell, George Westinghouse, Samuel Insull, etc. - were
morally purposeful business leaders.  Unfortunately the intellectuals
were united against them and not enough of their colleagues came out
in their defense, and no one foresaw how close we came to losing the
free enterprise system altogether until it was almost too late.
Moreover the earlier generation of morally purposeful business leaders
were not as sophisticated in their moral entrepreneurship, in their
moral leadership, as they needed to be (for instance, although Ford
really did care about democratizing transportation, and did so, he was
also a bigot).

Thus it is important that the new Conscious Capitalists be more
sophisticated, mature, aware moral entrepreneurs, and use their
enterprises and their abilities to create and lead enterprises in ever
deeper and more morally inspiring ways.  The fact is that free
enterprise is the most powerful tool for human betterment the human
race has ever known.  We need to pick it up and use it consciously.
We need moral purpose and we need the nimble, scaleable, innovative,
versatile power of free enterprise.  We need organizations in which to
work, in which to invest, with which to trade, and from which to
purchase goods and services that are truly deserving of our highest
moral aspirations.

It is natural and good for human beings to want moral purpose, and for
young people to respect, admire, and seek to emulate those individuals
with integrity who exemplify moral purpose.  As business leaders,
business schools, economists, and others who believe in the positive
power of free enterprise increasingly commit to a Conscious Capitalist
model in which the moral purpose of business is central to the life of
every so called "for-profit" corporation, we will see capitalism
increasingly respected as the powerful force for positive change which
it has the power to be.

A parable on the power of purpose:  As a delegate at the U.N.
Commission on the Status of Women, I attended a panel on innovative
ways of financing women's causes.  At one point when the panel was
discussing ways of obtaining funding from corporations, a delegate
from Brazil raised her hand to say that she would never take money
from a corporation because all corporate money was morally tainted.

At that moment I paused to consider the fact that she, and all others
there, clearly respected the U.N.  But what would we think of a
for-profit corporation which had a "Human Rights Advisory Board" that
included many of the worst human rights abusers on earth, that had
"Peacekeeping Forces" that went to developing world countries and
raped the women, and which was involved in a billion dollar oil
corruption scandal involving the leader's son and one of the worst
dictators on earth?  Strictly based on the facts of the case, such a
for-profit corporation would be regarded as a corporate criminal far
more evil than Halliburton or Blackwater.  And yet alongside these and
other grisly facts about the U.N., the U.N. exemplifies some of the
highest aspirations of the human race, as exemplified in the U.N.
Declaration of Human Rights and other U.N. documents.  And to a
remarkable extent aspiration trumps behavior when it comes to public
perception.  Our evolutionary code apparently inclines us to swoon
before moral aspiration much as it causes us to crave sugar and fat.

Hardheaded economists and businessmen may snigger when John and others
talk of "moral purpose" and "Conscious Capitalism."  For those who
would snigger at the real world impact of moral purpose on public
moral regard and reputation, I would have them explain why the U.N. is
regarded around the world as a more positive global moral force than,
say, Johnson & Johnson or EBay.

The fact is that the U.N. is not and never will be capable of making
the U.N. Declaration of Human Rights a reality.  But business is
bringing those goals closer to reality every day.  Conscious
Capitalists need to commit to goals as lofty as those of the U.N.
Declaration of Human Rights - and higher.  A global league of
Conscious Capitalists, with the stated intention of bringing peace and
prosperity to all, and manifesting their intentions with integrity,
could make extraordinary progress towards those goals.

And as millions of our brightest and most ambitious young people pour
into ever more morally committed corporate entities, and as we create
a more conscious operating system for capitalism, we will thereby
create a healthier world with happier people, a world of
morally-inspired enterprises in which profitability is ever more
closely aligned with contribution to the good, the true, and the
beautiful.

Peace,



Michael Strong
 CEO & Chief Visionary Officer
 FLOW, Inc.

P.S.:  For a fabulous account of how our evolutionary mind is confused
by contemporary economies, see Michael Shermer's new book, "The Mind
of the Market."

P.P.S. Don't miss John and the FLOW team at 2008 FreedomFest, July 10
– 12 in Las Vegas.

Most of us have always known this, of course, but Virginia Postrel has a great article at The Atlantic on how scientific evidence has finally convinced hospitals that it is worth their time to begin making hospital rooms beautiful:

Such “evidence-based design,” which draws its principles from controlled studies, is the great hope of professionals who want to upgrade the look and feel of medical centers. Much of this research follows a seminal 1984 Science article by Roger S. Ulrich, now at the Center for Health Systems and Design at Texas A&M. He looked at patients recovering from gallbladder surgery in a hospital that had some rooms overlooking a grove of trees and identical rooms facing a brick wall. The patients were matched to control for characteristics, such as age or obesity, that might influence their recovery. The results were striking. Patients with a view of the trees had shorter hospital stays (7.96 days versus 8.70 days) and required significantly less high-powered, expensive pain medication.

Along similar lines, a 2005 study compared patients recovering from elective spinal surgery whose rooms were on the sunny side of a ward with those on the dimmer side. Those in the sunnier rooms rated their stress and pain lower and took 22 percent less pain medication each hour, incurring only 80 percent of the pain-medication costs of the patients in gloomier rooms. Other studies, with subjects ranging from the severely burned to cancer patients to those receiving painful bronchoscopies, have found that looking at nature images significantly reduces anxiety and increases pain tolerance. Not all distractions are good, however. Ulrich and others have found that inescapable TV broadcasts and “chaotic abstract art” can increase patients’ stress.

This is a great specific example of the phenomena described by Daniel Pink in A Whole New Mind, in which he points out that the future of the U.S. economy will consist largely of making things more beautiful, more comfortable, more empathetic, and more humane.

Dear FLOW Members,

Two Buddhist monks came across a river where a beautiful woman was trying to cross the deep rapids.  The older one picked her up and carried her across the water, gently setting her down on the other side.  That evening when they reached their lodgings, the younger monk chastised his companion, noting that he had violated his vows by touching a woman.  The first monk replied "I set her down on the other side.  You are still carrying her."

Buddhist practice aims at cultivating an inner clarity that is free from impulsiveness and desire.  There are similar strands of thought in the western philosophical tradition; the Platonic Socrates, and later his Stoic followers, similarly sought a life free from a "slavery to the passions."  The Enlightened Buddha in the East, or the Philosopher in the West, both dedicated themselves to a personal discipline of the psyche in which their minds were free from the motivations that come from the neediness of the ego.  One need not believe that the ego is necessarily to be extinguished to agree that the ego ought nonetheless be subject to a discipline that recognizes that our intentionality may have higher goals than the needs of the ego.

Most people associate "unbridled capitalism" with "unbridled egotism" and believe that it is a social system that is driven by greed and vanity, from the capitalist who pursues monetary wealth beyond all measure to the consumer who constantly puts herself in debt to buy the next object she doesn't really need.  Indeed, there are those who believe that capitalism as a system depends on the multiplication of needs, and that if we all developed Buddhist or Stoic wisdom and discipline that it would all come crashing down.

But this understanding of what I will call "the free enterprise system" is as misguided as if we came to believe that the only books were those that encouraged us to covet and hate, ignoring the enormous diversity of written materials.  The free enterprise system is a powerful tool, much as the written word is a powerful tool, and it can be deployed in endlessly diverse ways.  Now that the 20th century bigotries against markets are becoming a thing of the past we are obliged to pick up this tool afresh and discover new and beautiful ways to use it.  Those of us who are still hostile to acts of voluntary exchange have not yet let go of 20th century animosities.

For those of us who are committed to a personal discipline of the ego, and who believe that we will be happier and better people if we train our desire, it can be frustrating to see so many people engaged in such acts of personal indulgence and vanity, many of which will not bring them greater happiness.  Our frustration is apt to grow when we are acutely aware of the enormous human needs of the world's poor, and see such waste of talent and resources as takes place constantly.  When one adds an understanding that there are limited material resources on earth, some find the frustration overwhelming and give themselves over to a life of anger and resentment.

But surely such anger and resentment is not a mark of wisdom.  Once one has set aside such unbridled impulses, how can one then act out of compassion and justice to make a better world?

For me, there are three priorities:

1.  The creation and development of communities of practice in which we may learn to become our best selves day in, day out, for a lifetime.

2.  The implementation of property rights solutions to tragedy of the commons problems so that we no longer need to worry about the problem of environmental sustainability.

3.  Increase economic freedom around the world to the point at which we have seven or eight billion people, all prosperous and freely engaged in fulfilling, peaceful, constructive work.

These are goals that the world's wisdom traditions would largely endorse if they were equipped with adequate intellectual tools.  Unfortunately all too few are exposed to the intellectual tools needed to deploy the free enterprise system to make a better world.  Thus my ongoing attempt to share some beautiful and powerful intellectual tools more broadly so that we may all work together on creating a better world.

There are adults who are spontaneously creating small communities of practice, in their workplaces and in their personal lives, to help them become their best selves.  As adults, we tend to be set in our habits and busy with adult responsibilities, and thus the process of becoming our best selves is a slower and less effective process with adults than it would be with young people.  This is why I spent fifteen years creating schools that served as communities of practice, and why I continue to support anyone who attempts to do the same in K-12 education.  The unfortunate truth is that it is not possible to create lasting communities of practice in government-managed institutions.

Peter Barnes, in Capitalism 3.0, has provided a brilliant first draft of an integrated set of property rights solutions to environmental problems.  If we are able to implement something like Capitalism 3.0 in the coming decades, we will be able to enjoy a world of ever-increasing standard of living without worrying about environmental sustainability.

Through our Peace through Commerce and Empowering Women Entrepreneurs programs I am most focused on communicating the impact of increasing economic freedom.  For some time now I've been focused on creating a prediction market game on economic freedom indices.  In November of 2006 I met with my thesis advisor and economics Nobel laureate Gary Becker to discuss this idea with him, and he agreed that

"The idea of a prediction market in economic freedom indices is interesting and worthy  of exploration.  If such an idea could be made practicable, such a market could have a very positive impact in increasing awareness of economic freedom and thereby improving prospects for long-term growth."

At the time I was thinking more of a commercial market than a game version, and spoke with Leo Melamed, the head of the Chicago Board of Trade.  Leo was intrigued by the idea, but impressed upon me the challenges of creating a successful commercial predictions product (and he has introduced more of them than anyone).

I've thus turned more in the direction of game development, in association with a school-based curriculum, as a more realistic approach to introducing the idea of predicting economic freedom ratings.  While it may at first sound like an odd theme for a game, when I worked in schools I introduced students to stock market games and found that they loved the excitement of trying to out guess the market, and that eventually they became motivated to do research in an attempt to do even better.  In a very different context, a few months ago I discovered realius.com, a real estate prediction market that is based on the idea of fantasy football.  With no cash prizes, Realius has developed an active market among real estate professionals competing to see who can best predict the price at which a given property will sell.  Chuck Teller, the founder, points out that if Realius had been in existence a few years ago it might have prevented the mortgage crisis.

The stakes involved in an economic freedom prediction game are even higher.  Last fall I co-wrote a paper in which I challenged Jeffrey Sachs to a wager:  Let's compare the twenty nations with the highest gains in economic freedom against the twenty nations that receive foreign aid to determine which ones experience the most economic growth in the next twenty years.  After writing that paper, I decided to check the twenty nations with the largest gains in economic freedom in the past ten years, 1995-2005.  Of the 122 nations for which measures are available, the top twenty gainers in economic freedom average rate of growth 2000 - 2005 is 4.2%; this set of nations as a whole averaged growth of 1.7%.

Ah, but statistics are boring.  And yet it turns out that if the entire world had grown at 4.2% instead of 1.7%, by 2006 we would have had an extra $10 trillion in wealth - this is more than five times as much wealth as is generated each year in Africa, and nearly as much as is generated each year in the U.S.  Basically if we increased economic freedom around the world, we could add a U.S. economy to the world every five years.  Moreover poor nations benefit more from a given improvement in economic freedom than do rich nations.

Let's take the case of Malawi, at $750 annual GDP per capita one of the poorest nations on earth.  For 2000-2005, Malawi has grown at a rate of .44% per year.  In 45 years time at this rate of growth, Malawi's GDP per capita would be $914.  At 4.2% annual growth, in 45 years time Malawi's GDP per capita would be $4776.  This is much better.  But the nations with top ten gains in economic freedom (without losing ground in their legal structure) averaged a rate of growth of 6.1%; this rate of growth would result in 45 years in Malawi reaching $10,844, almost where Mexico is today.  Of course China has been growing at or near 10% for some time now; if Malawi could do that for 45 years, they would have a GDP per capita of $54668.  And, lest this seem like the top of possibility, Dubai has averaged rates of growth of 17% for more than fifteen years.  If Malawi could average 17% for 45 years, it would have a GDP per capita of $17,329 in 20 years, $83298 in 30 years, and $877,859 in 45 years.

This may seem absurd, and yet everything about our wealth in the developed world would seem fantastic to anyone living in 1800 or 1900.  Fred Turner, in his wonderful article "Make Everybody Rich," estimates that by 2100 the average family of four around the world will be earning $320,000 annually, with of course much of the population being millionaires and some "poor" families only receiving $100,000 per year in income.

The real task is not to react against these marvelous possibilities; it is to steer them so that they happen more quickly, with less environmental damage, and a deeper fulfillment of human potential, happiness, and well-being.  The numbers are merely numbers; they can represent great ugliness or great beauty.  Ultimately the wealth that will be created, be it ugly wealth or beautiful wealth, will depend on the legal structures within which the billions of acts of creation take place.  At present far too many people are still stuck in a primitive 20th century opposition, either for markets or against them, either for economic freedom or against it, either for economic growth or against it.  The next stage is to transcend the opposition and recognize that the creativity, innovation, and entrepreneurship of seven or eight billion people can be directed in any number of different directions, towards great violence and destruction or towards ever deeper humanity and adventures of the spirit.

Do not cling to the violation of your vows.  Let go of your attachment to the old conflicts, and move forward into our next adventure of the spirit.

Towards peace and prosperity for all,



Michael Strong
CEO & Chief Visionary Officer
FLOW, Inc.