The Global Financial Crisis of 2007–8 which triggered the Great Recession had many causes, not all of which are well understood. But it is clear that one of the most important factors (if not the most important) was the general atmosphere of corporate greed, hubris, and fraud that peaked during the 2000s.
The cultural shift that made such corrupt behaviors acceptable did not happen overnight. We can trace it with such indirect indicators as the decline of social cooperation (see my blog on this here; also note the chart there showing the rise of frequency with which “corporate greed” is mentioned in the corpus of American literature).
A more direct approach is to look at the frequency of corporate scandals. The three post-war decades were remarkably ‘clean.’ Then, during the 1980s we started seeing such insider trading scandals as the ones involving Michael Milken and Ivan Boesky. But the scale of fraud and losses due to the scandals of the 1980s pales into insignificance when compared to the massive corruption of the 2000s.
I think that although it was not the largest (in terms of billions of dollars evaporating), the emblematic scandal of the 2000s was the one involving Enron. It’s now largely forgotten, given the string of much more recent (and more costly) scandals, but in many ways it defined the decade of 2000s. When Enron went under in December 2001, its shareholders lost tens of billions of dollars. Many of the 20,000 Enron employees lost their life savings. And the top executives of the company—Kenneth Lay, Jeffrey Skilling, and Andrew Fastow ended up in prison.
Lay and Skilling of Enron were followed in rapid succession by such famous corporate crooks as Bernard Ebbers of WorldCom and Dennis Kozlowski of Tyco. Then came Bernie Madoff and Lehmann Brothers. And immediately on their heels came probably the greatest corporate scandal—the Global Financial Crisis of 2007–8.
Jeff Skilling, who became the CEO of Enron in 2001, and resigned shortly before the scandal (but did not escape it; he is currently serving his sentence in the Federal Correction Institution in Littleton, CO), was the central figure in the Enron fiasco. Although he did not start Enron, by all accounts it was his vision and management philosophy that set Enron on its doomed journey.
Skilling’s favorite book was The Selfish Gene by Richard Dawkins. Skilling believed that people are inherently selfish and are motivated solely by greed and fear. Guided by this understanding of human nature, Skilling implemented a management system at Enron that promoted intense internal competition.
Every year Skilling recruited hundreds of new MBAs and then he fired those whose performance was ranked in the lowest 10 percent of the scale. Top performers, on the other hand, were lavishly rewarded. Naturally, Skilling and others in the top management layers of Enron got the biggest rewards. In the year before Enron’s collapse, Skilling earned $132 million.
Enron elevated internal competition to incredible heights. Traders, who needed to go to the bathroom, shut down and locked their computers because they were afraid that the competitor, sitting at the next desk, would steal their ideas. A former employee recalled, “If I’m going to my boss’s office to talk about compensation, and if I step on some guy’s throat and that doubles it, then I’ll stomp on that guy’s throat.” It should not be surprising that such an atmosphere of cut-throat competition bred “unethical behavior and financial impropriety”—in plain English, cheating and fraud.
Incidentally, Skilling is not unique in implementing the ‘Rank and Yank’ system. Most Fortune 500 companies practice the same, or a similar, approach, although they usually call it some more politically correct names.
So what role, if any, did Skilling’s favorite book, The Selfish Gene, play in the Enron collapse? As far as I know, Skilling never explained in a detailed way why he found The Selfish Gene so compelling. But this connection was made very clear by a fictional character, Gordon Gekko (played by Michael Douglas in the 1987 Oliver Stone movie The Wall Street).
In the famous “greed is good” speech before Teldar Paper stockholders, Gekko says:
The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. …
The point is, ladies and gentlemen, that greed—for lack of a better word—is good.
Greed is right.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
Greed, in all of its forms—greed for life, for money, for love, knowledge—has marked the upward surge of mankind.
And greed—you mark my words—will not only save Teldar Paper but that other malfunctioning corporation called the USA.
In popular press, which loves sound bites, this speech is often shortened to just “Greed is good.” Gekko, actually, never says it; the correct quote is “greed—for lack of a better word—is good.” In his speech, Gekko does much more than he is usually given credit for. He lays out his business philosophy and explains why greed is good. And he is very persuasive! (I urge the reader to follow the link here and read the whole speech or, better, watch the complete segment.)
More than that, Gekko uses an explicitly evolutionary reasoning in his speech. And this reasoning could come directly from reading The Selfish Gene.
Part II is here.
Disclaimer: As will be clear in Part II, I in no way blame Richard Dawkins for the fall of Enron or for the broader cultural shift that resulted in the proliferation of corporate malfeasance. The Selfish Gene is a well-written and generally brilliant, if flawed book.
THE SELFISH GENE is a LOT more flawed than brilliant. Besides introducing the ridiculous concept of “meme”–a supernatural being, odd for an atheist to invoke–it is based on flagrantly wrong science, or perhaps pseudoscience. We have known since before Darwin that animals cooperate, and there must be some way they manage it; even amoebas cooperate. I am an old-fashioned Hamiltonian–kin selection has to be at the base of it–and I am not a fan of the new group-selection ideas, but I have to face facts about amoebas, crows, people, and so on. But Dawkins is surely off the hook on this one–without Dawkins, Skilling would just have invoked Hobbes or the Greek cynics or somebody else. Of course the truth is that people can be either selfish or not, and are usually more complicated anyway (nobody is just “selfish”). It’s the choice matrix that matters. That often gets us back to kin, but far from always. We are clearly seeing in the US a shift to more and more selfishness, away from more communitarian values, and it doesn’t track kinship or nature or the like; it tracks the rise of big firms.
Gene, big firms (corporations) arouse in the 1890s and 1900s. Then they stayed with us. Nevertheless, greater equality, social trust, and cooperation first increased (to the late 1970s) then declined. So we need to look to other explanations for this trend.
As far as I can tell the idea that “The Selfish Gene” was Skilling’s favourite book comes from Richard Conniff in the Guardian piece “Animal instincts”. It doesn’t seem like a very credible source.
Yeah, right. Unusual greed.
Government forcing lenders to lend to exalted minorities no matter if they can repay (and punishing them if they don’t) had nothing to do with it.
Greed is universal at all times and all places. Idiotic policies that channel greed into harmful directions rather than let it dissipate in the market is what causes meltdowns.
Selfish genes is what most of us are born with. Pretending they do not exist and trying to build societies on that assumption causes even worse meltdowns.
Trying not to get stuck in the “normative critique” of Dawkins’ descriptive theory, I’d like to turn your attention to the practical, normative consequences of the Selfish Gene. Somewhere in the last chapters of SG Dawkins reasons (from our perspective it might be wrong because the ‘descriptive’ foundations are wrong) that being that we are intrinsically selfish we should put maximum effort in sustaining cooperation or we could say morality. On the other hand, all the biological theories that describe humans as particularly non-selfish, or more unselfish than selfish don’t have such practical conclusions – or better say impact. “We are selfish and that’s not cool” vs “We are not selfish, we are cool”. First maxim obviously carries more moralistic potential than the second one. (Although the group selectionist explanations of the emergence of morality are in themselves really enlightening, much more than ‘selfish genery’ – at least for those who want to listen and understand). To cut to the chase (and make some people frown :-)) as The Bible inspired both Tomás de Torquemada and Mother Theresa, somebody can say that ‘selfish genes’ inspired him/her to be selfish and greedy, I can say it inspired me to put more effort not to be selfish.
Igor, I address this issue in Part II. Basically, the gene-centric theory is both wrong (conceptually and empirically) and what’s worse, it is not a productive research program in the sense of Lakatos. It doesn’t lead to either suggesting new research, or suggesting how we can improve cooperation. In the language of my Marxist teachers in the high school, it’s a voluntarist theory. I simply will good things to happen.
Banks screaming and kicking while evil Bush and then evil Obama forced them, just forced them into defrauding their customers, into stealing from shareholders, into robo-signing, into manipulating oil/silver/gold prices, into rigging foreign exchange rates/Libor/Eurobor and the list goes on…
Good luck with living in a society where homo homini lupus est. Even the biggest and the meanest wolf eventually gets old and frail…
Random Lurker: See Part II.
Enron was so long ago. Then it was called crime, now it is called doing ‘God’s work’. It’s a ‘new normal’. No prosecutions anymore with Madoff being the only exeption.
Paying measily fines is considered a cost of doing business and that’s it.
I wonder whether there is a data series on the numbers of corporate/accounting/financial fraud cases. Perhaps I will have to construct it myself… but I think it will show a peak around 1900, a decline after 1930, and then a rise starting in the 1980s.
Hi Peter. Here is an interesting counterpoint about the apparent growth in corruption: http://www.nakedcapitalism.com/2013/11/growing-out-of-corruption.html
Thanks for this – very interesting!
Mike Milken was railroaded into “admitting” to violating highly technical regulations, none of which involved insider trading, and the sentencing judge determined that the total amount of injury suffered by his victims totaled some $300,000.