Posts Tagged ‘Cultural capital’
Limited Liability Partnerships

I am gob smacked, absolutely gob smacked at the latest manifestation of just how much of our cultural inheritance we have trashed. They may sound innocuous or even boring but “Limited Liability Partnerships” are a newfangled creation that has taken the accounting world by storm. Talk about corrupting the basis from which so much of our wealth has been generated.

Personal liability is a strong incentive to ensure your company does the right thing. It will make you particularly careful about your choice of partner. It will also make you more likely to look beyond the dollars they bring the partnership and ensure they behave appropriately. It was the basis upon which accounting firms worked, until various jurisdictions created limited liability partnerships.

Limiting partners liability reduces their incentive to ensure decent behavior. It is no surprise that this bastardized form of partnership came to the fore at the turn of the last century. Just in time to limit the liability of all those auditors happily signing off on fraudulent accounts. Safe in the knowledge they would not be sued for every penny their partners are worth. And safe they are, if my reading of Wikipedia is correct then PwC and Ernst & Young are limited liability Partnerships. Deloitte is limited by guarantee, whatever that means. KPMG is also a limited liability partnership in the US – registered in Delaware, that paragon of corporate standards. It’s enough to make one think the big 4 should lose their lock on auditing multinationals accounts. Perhaps it’s time to end the requirement for all of a multinationals subsidiaries to be audited by the same firm. It would certainly lower audit costs.

Is it any wonder that things really started to go crazy after the integrity of the accounting profession was undermined? How can the stock market fulfill its function when public accounts are often fraudulent fabrications? What will that eventually do to our faith in capitalism? Actually stock markets are failing badly at the moment anyway. They are floating ever higher on low turnover high frequency trading, despite unprecedented levels of liquidity. They really do not have much to do with funding new productive ventures anymore.

One trusted institution and profession has been trashed after another as our societies become ever more compromised. Destroying the cultural intangibles that enabled us to become wealthy is not progress. But it is happening and manifesting itself in so many different areas. Once academics argued about weather there was such a thing as truth. Now Presidents and Prime Ministers tell bare faced lies. Honesty and integrity are so yesterday. Unfortunately they are requirements for a wealthy tomorrow.

Once upon a time politicians tried to improve your well-being. Now they seem intent on replacing you with someone more likely to vote their way. It is as if they do not care what they destroy as long as they win the next election. I guess if you kill the engine of growth you make it far more important to take as much of the existing wealth as possible. After all, there will not be a whole lot more of it down the line. It is such a shame. Historians may look upon this as a gilded age of unprecedented wealth and well-being. Much as our ancestors used to view ancient Rome and Greece.

We had a great deal of cultural capital at our disposal. Capitalism is such a powerful mechanism for driving productivity gains. Much of society can operate without capitalist incentives and we will still get wealthier. But at the moment we are sabotaging our future in so many ways. We are trashing the cultural intangibles we inherited from our forebears.

It is our cultural capital that enables us to live lives of relative ease and plenty. Our cultural capital forms the very foundation of our civilization. It is not just science that stands on the shoulders of giants, but all of us.

Markets rigged

Looks like the mainstrem media are finally cottening on:

The Wall Street insider trading investigation may lead everyday investors — already rattled by a stock market meltdown, a one-day “flash crash” and the Madoff scandal — to finally conclude that the game is rigged.

“A large part of trading has to do with trust, and I don’t have it,” says Mark Swenson, a 43-year-old plumber from New Hampshire who refuses to buy individual stocks.

“When a stock moves up 10 percent, you don’t know why,” he added. “We can pretend that everyone has access to the same information, but they don’t.”

Even before news broke that federal investigators were looking into whether hedge funds traded on inside information, small-time investors were pulling their money out of stocks — despite a remarkable run for the market since the spring of 2009.

Americans have pulled $60 billion out of U.S. stock funds this year, according to the Investment Company Institute, a trade group. Meanwhile, investors have piled money into Treasuries and bond funds that are considered safer investments, even if they don’t return as much money. And at the same time, banks like Wells Fargo have reported that money is moving into checking and savings accounts.

You heard it here first.

Now perhaps they will start to realize how many core aspects of our culture have been corroded. How much of our cultural seed corn is being eaten. Gone are accounting standards, the rule of law, markets, security of title. How much more corruption can capitalism take? Will it just collapse in a smoldering heap, crushed by its own contradictions? We have posted about this before here.

Lee Kuan Yew summed it up well:

“If you believe that it’s permanent, it will come tumbling down and you will never get a second chance.”

Enough is enough.

Destroying Cultural Capital

It is always flattering when a “noble prize” winning economist agrees with you. Stiglitz has noticed the implications of the foreclosure crisis for the rule of law and property rights:

“The mortgage debacle in the United States has raised deep questions about “the rule of law,” the universally accepted hallmark of an advanced, civilized society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America in the wake of the sub-prime mortgage crisis, it has done neither.

Part of the rule of law is security of property rights” (Stiglitz, November 2010)

Once Stiglitz pursues this line of enquiry further he will be in agreement with USA destroying cultural intangibles:

“The fault at the heart of the MBS security market is further evidence that the US is in the process of destroying the cultural intangible capital that enabled them to grow wealthy. Gone are accounting standards, the rule of law and the certainty of property title. What next?” (Rob, October 2010)

He may then come to agree with Stock markets, they win we lose :

“Let’s add the stock market to the list of cultural intangibles being undermined – accounting standards, the rule of law, property. Talk about wrecking your cultural inheritance. Like the justice system, free market exchange does not just have to be fair. It has to be seen to be fair. With bailouts followed by bonuses and government endorsing or actively participating in the rigging of markets there will be a crisis of legitimacy.” (Rob, October 2010)

Trust is also a cultural intangible that enabled the West to become wealthy. Even if you don’t agree with much of Francis Fukiyama’s Trust, it contains an element of truth. Like many he takes a good idea and pushes it too far. But trust is central. Hence the problem highlighted in TARP damaging trust:

“When Treasury refuses for more than a year to require TARP recipients to account for the use of TARP funds, or claims that Capital Purchase Program participants were “healthy, viable” institutions knowing full well that some are not, or when it provides hundreds of billions of dollars in TARP assistance to institutions, and then relies on those same institutions to self-report any violations of their obligations to TARP, it damages the public’s trust to a degree that is difficult to repair.” (Neil Barofsky).

If you have any doubts at all about the seriousness of what is happening in America then read Hernando De Soto’s The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else:

In the West, standardized laws allow us to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into so many publicly tradable stocks, and make it possible to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions. This invisible infrastructure of “asset management”–so taken for granted in the West, even though it has only fully existed in the United States for the past 100 years–is the missing ingredient to success with capitalism, insists de Soto. But even though that link is primarily a legal one, he argues that the process of making it a normalized component of a society is more a political–or attitude-changing–challenge than anything else.

With a fleet of researchers, de Soto has sought out detailed evidence from struggling economies around the world to back up his claims. The result is a fascinating and solidly supported look at the one component that’s holding much of the world back from developing healthy free markets (Timothy Murphy).

Like Fukiyama I suspect De Soto has focused on only one of the reasons for Western growth. There can be multiple supporting factors behind the success of a society or civilization. It does not have to be an either or situation.

But what is quite clear is that as a society the US is eating its cultural seed corn. If the requirements for economic success are removed there will be no economic success. The US is at the risk of validating John Sinclair (1754-1835):

If we go on at this rate, the nation must be ruined. Smith replied: “Be assured, my young friend, that there is a great deal of ruin in a nation” (Adam Smith, Correspondence of Adam Smith, 1977): p 262, note 3, from Sinclair, Corr., i. 390-1).

Residents of Western Civilization must be thankful that Adam Smith was right in this as well as much else. But while there may be a great deal of ruin in a nation, there is a great deal of debt in the US and other developed countries. Everything has its limits.