The ethical engine

Mankind is today facing some of its toughest challenges, and it is no surprise that some of these have escalated to the priority list of the World Economic Forum. Business pundits are finally getting worried that unbridled capitalism can bring a fatal blow to the economic ecosystem, and thus their own survival. More importantly, the future of mankind itself is at stake with the natural ecosystem dangerously flirting with disaster. The excessive and unprece-dented concentration of wealth and income are likely to be detonators to the social time bomb that has been ticking inexorably since the end of the cold war and the unfettered rise of capitalism. While there is little doubt that the growth of corporations to gigantic proportions have had a critical role in creating this explosive situation, there is possibly an underlying cause, deeply rooted in human nature that could account why our economic systems fail repeatedly in history.

This is what our Central bank governor, in the wake of the BAI crash and the nTan report, aptly called moral decay, leading to ethical failure on the part of corporations and individuals. The frauds and scams in Mauritius are only a reflection of what is happening elsewhere in the world. The most glaring example is what led to the sub-prime mortgage crisis, subsequently triggering recessionary cycles across the globe. The financial industry devoted enormous amount of talent and resources in developing and selling inherently flawed financial instruments, thus breaching the trust of customers who had no reason to doubt the integrity of the professionals and authorities charged with securing their investments. Other cases abound, with some of the most respected corporate names caught in massive tax frauds, high profile politicians jailed for corruption, Ponzi schemes that managed to defraud thousands of credulous victims, human trafficking. There is no dearth of ethical failure, be it from the corporate or the political world and this is a constant challenge to governance regimes.

Yet, while observers may think that this is an unprecedented curse in our history, it turns out that there is quite a familiar cycle that repeats itself time and again since the dawn of civilisation. The lessons learned may certainly be useful in guiding our strategy against ethical failure. Peter Jay, in his insightful retrospection of human economic history (Road to Riches, or the Wealth of Man), examined the patterns of economic behaviour and observed a general experience of mankind which he sums up in two axioms: Axiom1: People, given half a chance to improve their lot, including that of their family and near community, will put forth extraordinary cunning, diligence and persistence in pursuit of that goal.

Axiom2: Mankind’s political failures expose human societies to the chronic risk – and intermittent certainty – of progress reversed and prosperity dissipated… These failures consist in man’s inability to resolve for good the conundrum: economic success requires good government, but all government breeds misgovernment and misgovernment destroys prosperity.

These two axioms set forth what Jay calls a waltz motive, or a three-step pattern. With each great invention or technological breakthrough there comes a rise in economic advancement, creating wealth and raising standards of living. But this provokes predatory threats as well, from external raiders or internal idlers who seek to expropriate economic benefits with no cost or effort. This eventually calls for socio-political solutions in the form of rules that deter predatory tendencies, and more importantly in radical institutional reforms. Throughout history, institutions (defined by Douglass North, Nobel Prize for economic theories on institutions as humanly devised constraints that structure political, economic and social interaction), have been devised by human beings to create order and reduce uncertainty in exchange. Together with the standard constraints of economics they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity. Hence failed institutions lead to reversal of economic progress, and in the search for new solutions, it is important to understand why institutions fail.

Part of the explanation dwells in the existence of an ethical mechanism or ethical engine which has been driving institutional evolution. Individuals’ behaviours and decisions are guided by ethical values of self-interest, family relationships and friendships, group interests, and intrinsic values of fairness and justice, each individual having his own unique interpretation and combination of these principles. Individuals thus shape institutions according to their ethical values, and institutions in turn influence the way markets, corporations and society evolve and interact with each other. In this constant flux between individuals, organisations and institutions, ethics play a central and motive role. Ethical principles are an integral part of economic engines: they serve the same kind of functions as fuel and timing systems do in engines: impetus and coordination. When the fuel and timing systems fail, the engine stalls. Similarly, when ethical principles are violated, the economic engine fails.

Recent events, both local and across the globe, have shown to what extent individuals and corporations indulging in fraudulent activities, displayed utmost cunningness in embezzling the sa-
vings of millions of individuals, who see their lifetime savings vanish in thin air. Taking advantage of lax governance regimes, or conniving with corrupt public officials, or even engaging in reckless business practices next only to gambling, they have been robbing society of its livelihood, and slowly and surely bleeding it to death. However, such overt ethical deficiencies do not all explain the disastrous situation mankind is now facing. In a more insidious way, the untrammelled drive for profits, globalisation and new technology have been pushing consumerism to all corners of the world. Society is being blindly led to adopt a lifestyle which aggravates global warming and income inequality. In the constant pursuit of the ephemeral happiness procured by the buying mania, people get entangled in a deadly cycle of wasteful and unhealthy consumption, forsaking in the process future generations’ rights to earth resources.

The time is over for debating on the tenets of a system that creates so much harm and disparities. The time is for bold action to reverse the damage, if at all possible. This will call for the most radical institutional reforms, like our Governance and Integrity Reporting Act, or similar harsh legislations elsewhere to combat fraud and corruption. On a broader level, COP 21 is a clarion call for all governments and corporations to prioritise sustainable development and re-orientate a market that so far fails to internalise social and environmental returns. As an example, regenerating the soil and converting it into a carbon sink will reverse global warming faster than any other methods, but the investment is huge and the prospect very long term. Can governments resist corporate lobbying for short-term gain and engineer the necessary changes in lifestyle and consumption patterns to make this happen? Will voluntary corporate governance codes be enough to ensure that corporations subscribe to ethical forms of business practices and temper their drive for pro-fits with social and environmental concerns? How long will it take for ethics to be ingrained in the DNA of enterprises, public and private alike, and what cultural change is needed to make this happen? Is there a need for a new breed of business and political leaders, people who are constantly alive to the burning issues facing humanity and breathe them in their daily action? How to foster governance regimes that are impervious to sectoral lobbies and self-serving interests?

These are institutional issues that need to be addressed sooner than later, not only to pursue our aspirations for economic and social progress, but to halt the dooms hanging on our heads. The ethical engine badly needs an overhaul, so perhaps it’s time to think of how to institutionalise moral development and ethics at all levels of society.