The Economics of Integrity
From Dairy Farmers to Toyota, How Wealth is Built on Trust & What that Means for Our Future
Harper Collins, 2010, 186 pp. ISBN 978-0-06-177413-3
Bernasek has written on finance and the economy for several national and international magazines. The 2008 financial crisis raises the question of how to move forward. This is the author’s response.
Integrity is our greatest economic asset; it forms the invisible bedrock of our economy. To regain prosperity we must rethink the way we do business in light of the importance of trust. “We need to build the trust that will power the economy for decades to come. The purpose of this book is to show how that can be done. … By appreciating integrity as an asset that is valuable, companies can learn how to invest in it and create wealth.” (2-3) [If integrity is viewed as a pragmatic issue, rather than a moral imperative, will that be sufficient to make it work? dlm].
“The financial crisis of 2008 was first and foremost a crisis of integrity. The seeds were sown as great numbers of people sought their own short-term advantage, knowing that they were putting others at risk. In short, it happened like this: Homeowners took out mortgages that they knew were likely to prove unaffordable later on. Banks lent money knowing it was unlikely to be repaid. Wall Street operators bought the junk mortgages and resold them in the guise of sound investments. Accountants, lawyers, and ratings agencies collected hefty fees for misleading assurances. And investors giddily chased outlandish returns, unconcerned by the all too apparent risks. In the climate of greed, frauds great and small multiplied and spread like potent germs in a warm petri dish. The whole vast and intricate financial universe…had been diabolically converted….into a casino where gamblers were risking mountainous piles of other people’s money.” (7)
“In the end, those in charge compromised the integrity of their institutions and ultimately the integrity of the entire financial system.” “Suddenly no one trusted anyone enough to do business with them, and credit markets stopped working.” (8)
“It was a wake-up call. Ignoring or, worse, abusing integrity isn’t just unpleasant for a few bad apples and their unlucky victims. It has profound economic consequences. At stake is the entire global economic system, the modern way of life.” (8)
“The real value of integrity is not personal; it’s collective. It’s the underpinning for all our commercial relationships. … It’s a shared asset that makes us wealthy.” (11) “Pervasive integrity is fundamental to our enormous, fast-moving economy.” (11)
“Integrity is an unstated assumption in nearly everything we do, from withdrawing cash to investing for our retirement. There’s a mountain of integrity out there, and it’s what makes the economy go.” (13)
Unfortunately the author uses Toyota as her prime example of integrity, not realizing that before the book was published Toyota would also come under heavy scrutiny for possible integrity questions!
“The message has to change from ‘do right or you’ll get caught’ to ‘do right and you’ll benefit.’” (16)
“The milk supply chain reveals how many layers of integrity and trust are embedded in a simple transaction. It’s not just the customers who rely on other people when they buy a gallon of milk. Every single person in the chain depends on those who came before in the process, starting with the farmer.” “It adds up to a huge amount of integrity in a single gallon of milk.” “Of course, it’s not just milk that depends on relationships of trust. Every aspect of modern life does too. … When we fly on an airplane, we depend on thousands of people to make sure the plane arrives safely.” (28, 32)
The Chinese milk scandal caused economic hardship that was borne widely across China.
Integrity consists of trustworthiness—that someone is following the rules and telling the truth and being careful on the job—and trust—believing the seller is trustworthy. “In the short term, there’s a constant temptation to cut corners to save money or exploit the trust of others. But when one person cuts a corner or exploits the trust of another, it can hurt everyone.” When everyone in the chain acts with integrity, everyone benefits. “The true economic value of integrity is evident when you view it as a relationship that produces shared benefits.” (36) “Any relationship that breaks down has a ripple effect throughout the system.” (37) This means every individual has the power to make the economy stronger. Your integrity matters to all of us.
There are twelve key relationships of integrity and trust represented in a single ATM withdrawal. Every one of those relationships was built over time. This trust is essential for an ATM withdrawal to occur.
There is about $200 billion in gold bullion in the Federal Reserve Bank in New York. Most countries store their gold there. These countries trust the U.S. and this bank to keep it safe. Its integrity is backed by the U.S. government. Depositors don’t fear that the U.S. will seize their gold. They trust the U.S. government and the American people. The Federal Reserve Bank is the guardian of the modern world economy.
A brand is stored up integrity. (82) “Over time, customers can tell when they are looked after.” “The key question for any product or service should be this: does this product create lasting value for the customer?” “Sacrificing the long term for the short term is not a viable strategy.” (93, 94)
L.L.Bean has a 100 percent guarantee for its products, no matter what. L.L.Bean also trusts the customer to behave fairly! (98) In business, trust isn’t just one-sided. “All businesses have to trust their customers to some extent.” (99) The Metropolitan Museum of Art has a ‘suggested’ entry fee. Pay-what-you-want pricing is intriguing because the provider expects the customer to pay a fair price, yet the customer is not required to do so. Tipping works this way as well. And it works because we have developed expected standards for tipping.
The market trades on trust. “When transactions are done on a verbal basis and only later confirmed in writing, a person’s word is an incredibly valuable asset. Integrity is the critical factor that allows traders to trade.” (117)
The principle of trust ripples throughout our modern economy. After the 2008 drop in the economy, the U.S. financial system continued to function. “The public didn’t abandon investing in stocks, bonds, and other financial instruments. … There’s a lot of trust remaining in the industry.” (126)
eBay operates on trust. Strangers trusted each other for a total of $8 billion by the end of 2008. “The eBay site had created an integrity system, a system where buyers and sellers treated each other fairly and unlocked economic benefits that were previously unavailable. … From scratch, eBay had built a platform where users had an incentive to behave honorably and where their integrity and trust were rewarded.” (128) The backbone was a feedback system. Users get feedback on how they conduct themselves from other users. There is a score-keeping system that brings everything into the open. Further, eBay users can talk with each other via a bulletin board on the site. “By treating eBay users as members of a community, eBay instilled a sense of responsibility into those using the site.” (135)
“The modern political approach to integrity can at times fail miserably. It’s too often about a show of toughness, making everybody jump through hoops and threatening violators with heavy penalties. The stated goal is often to eliminate wrongdoing. That’s not wrong in itself, but it misses the much larger point. Unless there is a conscious effort to create a self-reinforcing system, writing rules to show ‘toughness’ about whatever caused the latest crisis tends both to put unwelcome burdens on the honest and herd the unethical into new, not yet prohibited misadventures.” (144)
“The U.S. tax code is the poster child of missing the target.” (145) [Maybe what we should do instead is to post the amount of tax everyone paid. What do you think? dlm]
“Integrity is something we can learn to cultivate. Using the basic building blocks of integrity we can invest in our collective integrity assets and, as a result, our wealth.” (147)
“The point of disclosure is to bring the truth out into the open and allow people to make their own decisions.” (149) “Clear and simple standards that are universally understood are critical.” Like traffic laws, rules of the road. And the system should be self-reinforcing, like drivers flashing their lights when you’re on the wrong side of the road. “It’s a fine balance between giving people enough room to operate and providing boundaries in which to do that.” (151)
“Systems that intelligently combine disclosure, norms, and accountability have all the right ingredients to create integrity.” (157) “The tax code could promote integrity. A tax system that was open, clear, and understandable, and made it likely that cheaters would get caught, would go a long way to changing our behavior.” (160)
“The trick to creating integrity is to get people thinking about the long term.” (162) [It wouldn’t hurt for grownups to model it and teach it to their children as well. Dlm]
“Secrecy allows those in the know to take more of the pie for themselves. Bringing critical information out in the open helps everyone make better decisions. It makes the pie bigger for all.” (170)
[So, what do you think? Dlm]
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