What do Rioting English Youth, Bankers and Journalists have in Common?

A failure to distinguish between right and wrong, otherwise known as amorality.

England, in recent days, has experienced wanton looting and vandalism from significant proportions of its youth. Rebels without a cause, they revel in the opportunity to disrupt the lives of others and to acquire ill-gotten gains. But that's the point. They do not see these gains as "ill-gotten", for they do not see right or wrong, only opportunity.

In this regard, they are no different from the recklessness of the bankers who generated the global financial crisis that continues to this day; nor from the transgressions of the UK press who gained illegal access to private phone calls in order to sell newspapers and make a profit. That is because much of the Anglo-Saxon world is dealing with a systemic cultural crisis of values i.e. two to three generations who have grown up with no moral compass. A human tsunami, overwhelming all that lies in its path.

Why does this matter? Well, evidence suggests that it matters greatly for the long run economic competitive advantage of countries. Simply put, pervasive amorality means that the average businessman or woman is (relative to his counterpart in a society with business-friendly moral codes) less certain about whether his business partner will fulfil his side of the deal. The relative risk of doing business grows with this increasing uncertainty, which - if untreated - can spin, exponentially, out of control. Ernst Fehr and Jean-Robert Tyran showed, in 2005, how a few irrational crazies can damage the economy for us all.

All other things being constant, the volume of business being done in the amoral society drops, relative to that being done in the country with business-friendly morals. A vicious cycle of falling confidence, lower economic activity, increasingly desperate opportunism, greater falls in confidence etc etc can be set in motion. The late Pierre Bourdieu (1930-2002) complained endlessly about the false distance between sociology and economics, effectively noting that "social exchange" and "economic exchange" were Siamese twins sharing a single heart. The Anglo-Saxon world gave him short shrift.

The fact that there is less real wealth being produced in the amoral society can be hidden for a while, as we learnt during the heady days of the technology sector boom - when obvious flaws were swept aside by insane talk of a "new economics"; and when even the Chairman of the US Federal Reserve was blithely ignored when he warned of "irrational exhuberance" in the financial sector. In those days, people ignored the implications of the much talked about distinction between the "real economy" and stock market valuations.

In the end, as all well trained accountants know, substance must prevail over form. That future is well and truly here and now.

In recent decades, Sierra Leone has experienced what must be close to a worst case scenario of the ill-effects of pervasive amorality on the economy and society. As our society begins the hard task of pulling ourselves out of the mess, world events since 2008 have clearly shown that no country - no matter how powerful today - can afford to be complacent about their socio-economic distance from Sierra Leone.

The tough message, from recent research carried out in Sierra Leone by this writer, is that correcting cultural lapses is a long haul project for which there is no quick fix. Thankfully, there are tools, techniques and experiences available for a road map. Ironically, one of the best reviews of such tools and experiences was compiled by the British Prime Ministers' Strategy Unit in early 2008! It was an answer looking for a question. It need look no longer.

Culture is a powerful driver of long term economic competitiveness and relative national prosperity. Poorly managed, it can act like a neutron bomb, leaving familiar structures intact, whilst wiping out the vital life forces of a sound economy. Discipline and morality - the eternally double-edged sword - are not just issues for the pulpit. Their effects are ultimately felt in the boardrooms, on the editors' desks and, as England has painfully discovered, on the burning streets.

America’s Debt Ceiling Crisis & the emergence of Virtual Ethnic Groups

The Editor

The Economist Newspaper
London

31 July 2011

 Sir,

 America’s Debt Ceiling Crisis & the emergence of Virtual Ethnic Groups

The evidence is clear. Typically, multi-ethnic societies are at a competitive disadvantage relative to their homogeneous peers. Diversity can result in malign ethnic competition for control of state power and resources. Ethnicities may seek their interests in a manner that results in adverse social and economic outcomes for the State as a whole; leading to multi-person prisoners’ dilemmas as described by Robert J. Aumman (cited by Vivian Walsh in 1994):

“The universal fascination... is due to its representing, in very stark and transparent form, the bitter fact that when individuals act for their own benefit, the result may well be disaster for all.”

In 2005, Alberto Alesina and Eliana La Ferrara indicated how this can happen. First, individuals may attribute positive utility to the well being of members of their group and negative utility to that of members of other groups. Second, it may be more efficient for individuals to “transact preferentially with members of one’s own type…”. Third, diversity can impact on the “production function” e.g. through an inability to agree on common public goods and public policies. Fourth, whilst the production of pure public goods may be lower in a fragmented society, the public provision of private goods (PPPG) – targeted to benefit specific individuals and groups – may be higher.

Martti Siisiäinen, writing in 2000, hinted at the solution i.e. a multi-ethnic social contract:

“Well-functioning modern societies have to have a value basis that is based on the voluntary regulation of social relations between persons who are foreigners to each other”.

Failing such societal trust, they risk the creation of vicious cycles featuring:

“…distrust, breaking of the norms of reciprocity, avoiding one's duties, isolation, disorder and stagnation. The result is the development of a “non-civic community” ”.

We have long struggled with these challenges in multi-ethnic Sierra Leone.  America, diverse from its foundations, had an effective social contract founded on the experience that the historically dominant WASP culture would serve the economic well-being of all groups.

In recent decades, and sharply since 2000, that societal trust has been eroded. We have seen astonishing levels of PPPG in cleverly legal disguises; contributing to the financial crisis of 2008 et seq. Now, America is characterised by virtual ethnic groups (tea party vs liberals, pro-lifers vs pro-choicers etc) who define themselves by their implacable distrust of other groups. The sense of common purpose has vanished. The debacle over the raising of the debt ceiling, no matter how it is resolved, is unlikely to be the last symptom of the decline of Pax Americana.

Yours faithfully,

Omodele R. N. Jones

CEO, FJP Development & Management Consultants
Freetown, Sierra Leone.
Note: WASP – White Anglo-Saxon Protestant

Are Financial Instruments an Accounting or an Auditing Problem in the wake of the Global Financial Crisis?

Paper for the Conference of National Standard Setters (NSS) April 2010 meeting in Seoul, Korea                                             

The Global Financial Crisis – Accounting for Systematic Risk – Cultural Perspectives

Prepared by Omodele R. N. Jones, Chair, CSAAG Sierra Leone

Council for Standards of Accounting, Auditing, Corporate & Institutional Governance

Brief:

The paper considers the role of cultural factors in the generation of the Global Financial Crisis. It identifies constructs that may make accounting standards that require “marking to market” pro-cyclical i.e. they may accentuate booms and worsen downturns. As the International Accounting Standards Board (IASB) struggles to develop a response to the crisis of confidence, its efforts may prove, ultimately, to be in vain. It may be that no accounting standard – at least in the current paradigm – can deal with a problem that is inherently systemic. Indeed, it may not be an accounting problem at all, but may be an auditing problem. Current auditing focuses on individual company accounts. The challenge may be to evolve an audit process that includes the assessment of risks that affect the wider systems within which companies operate.

Omodele R. N. Jones

July 2011

Original NSS Paper:

Financial crises are typically preceded by hyper-inflation of asset prices. When we experience consumer price hyper-inflation, we normally react quickly, spurred by concern for its adverse effects on society: it robs the poor and reinforces the rich, and can over time lead to serious social instability.

In what way are the effects of hyper-inflation of asset prices – typified by the common distinction between the financial markets and the “real” economy - different? If they are not different, how can hyper-inflation be detected in asset prices? What is the impact of current and proposed accounting treatments of financial assets on hyper-inflationary tendencies?

Current accounting valuations require marking to market. The dominant economic theory that has supported the development of the financial markets over the last thirty years assumes that markets are efficient i.e. all relevant known information is reflected in the asset price. They belong to the rational choice school of neo-classical economics that depend on the actions of “economic man” who is assumed rational with perfect information and seeking of self-interest in a gentlemanly way. With economic man at play, the markets are said to provide a mechanism for smoothly managing market disequilibria with actions that lead to new stable and good equilibria.

But markets have long been known to be prone to failures, some unexpected, others predictable. The Global Financial Crisis of 2008 and the recession of 2009 is but one. What insights can 2009 Nobel Economics Laureate Oliver Williamson’s path breaking 1970s work on transaction cost economics (TCE) offer into our understanding of the appropriateness of the mark to market orthodoxy? In particular, what are the implications of his TCE presentations on bounded rationality and on the economics of opportunism or moral hazard?

TCE pairs the concept of bounded rationality with an assumption of human self-interest seeking that “makes allowance for guile”. This allows for the disclosure of information relevant to a transaction in a selective and distorted manner. Pre-meditated efforts to “mislead, disguise, obfuscate and confuse” are anticipated. Williamson thus distinguishes between the traditional concept of the gentlemanly “economic man” and his new concept of “contracting man” (also known by Hardt as “organisational man”) who is “given to a self interest of a deeper and more troublesome kind than his economic man predecessor”. Williamson argued in a 1989 article that this new concept addresses the reality of “man as he is”.

If economic man does not dominate a market, and is instead replaced by “organisational man”, it can be shown that marking to market can actually reinforce asset price bubbles.

Can asset bubbles be shown to possess self sustaining forces of a “perverse equilibrium”? What insights can be gained from game theoretic Prisoners’ dilemmas in this vicious cycle?

“The universal fascination with this game is due to its representing, in very stark and transparent form, the bitter fact that when individuals act for their own benefit, the result may well be disaster for all.” Robert J. Aumann cited in Walsh (1994: 402)

What are the links between these insights and the actions of Williamson’s “organisational man”?

Is there a market for personal values i.e. “a broad preference for one state of affairs over others” (Hofstede)? Pierre Bourdieu spoke of the inseparable link between “social exchange” and “economic exchange” i.e. all personal and societal relationships have economic outcomes “at the root of their effects”. If this is so, can a “social market” for values be subject to the adverse effects of Nobel Economics Laureate George Akerlof’s market for lemons? If so, adapting his analysis, we can see that “bad values” may drive out “good values” of a social market.

Would the dominance of “organisational man” in a market lead to a lemon market for values? Is this how “Greed is Good” creeds are borne? Are these a part of an asset price bubble mechanism having worked their way from social exchange into economic exchange? Does marking to market, in this context become part of the problem?  Once a new, bad/perverse, equilibrium is established, can we detect behaviours akin to Nash equilibria (where a change in strategy by any player would lead that player to earn less than if he remained with the current strategy) that sustain bad habits until the inevitable crash sweeps all away?

How susceptible are differing cultures to these forces? Is there evidence of one culture being better at managing these threats than others? Why?

Should accountants develop a standard for accounting for hyper-inflation in asset prices? How would hyper-inflation be detected and how would adjustments be made to asset prices in financial statements?  Is it the role of the accountant to dutifully report on the real effects of economic activity, or are we to acquiesce in the roller coaster of asset booms and busts? Who are we responsible to anyway? Society and the greater good of all? Or are we really responsible to our bosses, the “organisational men”?

Omodele Jones is Chair of CSAAG Sierra Leone

The paper represents his personal views and do not necessarily represent the views of CSAAG. He is in the final stage of a part time Doctorate in Business Administration at Edinburgh Business School, Heriot Watt University, Scotland. The issues above arise from his research topic: “Countries and Companies do not compete, Cultures Do! The role of social, cultural and symbolic capital in generating national competitive position in Sierra Leone”

The UK Press Hacking Scandal: Substance over Form

The Editor

The Economist Newspaper
London
8 July 2011

Sir,

There is much fulmination, rightly, over the conduct of the News of the World. Sadly, in all the furore, the main point is being missed.

There is, in essence, no difference between the amorality that hijacked the News of the World and the amorality that infused the Banks and led to the Global Financial Crisis (GFS). Press Hacking and the GFS are both symptoms of the same malaise - the tsunami of amorality that has swamped the Anglo-American Heartlands; since the dams were breached in the Thatcher/Reagan era. There is compelling research evidence to suggest that culture is a predictor of future economic outcomes. Well, the future is here!

We do not live in an age of Financial Crises. It is merely a symptom; as is Press Hacking.

We live in the turmoil of a Global Crisis of Values.

Welcome to Africa's World.

Yours faithfully,

Omodele R. N. Jones esq

CEO
FJP Development & Management Consultants
Freetown, Sierra Leone