Martin Mayer, Corporate Complexity, and...Jean-Jacques Rousseau

I’ve been reading an old book called Nightmare on Wall Street (1993) by Martin Mayer, about the Salomon Brothers Treasury-note bidding scandal back in 1991. In addition to being interesting because it details the scandal for which then-SEC Commissioner Richard Breeden was called to task about, it also displays a framework that’s unusual in finance books - a thoroughly Rousseauian one. Specifically, its perspective is rooted in Jean-Jacques Rousseau’s first discourse, the one that argued that progress in the arts and sciences causes decay in society’s morals.

Rousseau’s argument, heavily controversial in its time, goes like this: when there are few scientists, artists and abstract thinkers in a society, the bulk of its members are simple men with clear-cut morals. In such a society, most everyone knows right from wrong because there’s no complexifiers around. In addition, there’s no advancement opportunity in becoming a scientist or artist, so the talent pool is limited to those who love their field for its own sake. Such a society is filled with simple, yet robust and resourceful people.

The growth of art means the growth of role models who are not living people, according to Rousseau. This prompts the growth of formal courtesies which become more artificial over time. In addition, the growth in numbers and prestige of artists means that “art for art’s sake” is debased into “art as an exclusive club.” Using art to influence other people for the sake of power-tripping becomes more and more frequent. The end result is that the simple but powerful men, the one whose strengths are the backbone of national greatness, are slowly put underfoot. What used to be virtuous becomes rude. What used to be excellence becomes uncouthness. What used to be pure becomes simplistic. What used to be prowess becomes a threat. What used to be common sense becomes stupidity. And, what causes this transformation according to Rousseau, is the plain fact that all artists are incorrigibly vain.

The growth of the sciences, Rousseau argues, does not result in that many benefits to humankind; instead, it results in the growth of pedantry and abstruseness. Much of it can be seen through by asking this question: how much better off were we before the growth of scientific progress? How much of scientific progress that has actually resulted in a pointable-to real benefit to humankind, has merely fostered the growth of luxury, idleness and vanity? A mute but eloquent set of counterexamples, to the dictum that all progress in science is “good,” can be found in those points of history where rich and sophisticated civilizations have been conquered by societies of rustic barbarians. There is much evidence to be found that a military equipped with the best tools and scientific ideas slowly decays into self-absorption, a state where its generals know everything there is to know about sophisticated war except how to win. Rousseau ends his argument that the growth of artistic or scientific professions means a growth in the number of practitioners who are just plain mediocre.

Martin Meyer’s adaptation of the above framework goes like this: the progress of derivatives and mathematics-driven trading corrupts customer service in the investment industry. As the number of products proliferate, and the number of hedging and arbitrage techniques become more numerous and mathematically sophisticated, the investment field becomes more and more dependant upon people who become more and more specialized, and more and more in love with their own specialty. As complexity is compounded upon complexity, the customer becomes less and less of a real person with real needs, and more and more of an abstraction. The irony of this ‘progress’ is that standards of ‘customer service’ become more and more stereotypical. Thus, there is more and more temptation to deduce, or assume, that the customer “oughta want” such-and-such. It’s only a matter of time before the customers get jerked around.

In addition, Mr. Meyer adapts one of Rousseau’s other arguments in that Discourse: “We have physicists, geometricians, chemists, astronomers, poets, musicians, and painters in plenty; but we have no longer a citizen among us…” As the investment field become hyper-specialized, the relevant statutes are no longer seen as part of the laws of the land, but as rules, then “rules of the game,” then as mere obstacles to be outfoxed. Specialism implies gamesmanship.

The relevance of this philosophic framework to corporate governance isn’t obvious. Advocates for corporate governance could draw from this argument by saying that corporate-governance reforms are being put in place to wring the gamesmanship out of the executive suite and to put the shareholder back in the owners’ seat. Skeptics could argue that corporate-governance experts are just another bunch of paper pushers with a new line, who will wind up being as self-aggrandizing as the crop they’re shoving out. If anything, the skeptic can further argue, they’ll be more cunning than the current suits are.

Interestingly, either side of the corporate-governance debate could take the opposite side of Rousseau’s discourse, too. The pro-governance side can argue that current management techniques are potentially exploitative because they’re not provably transparent. They can also bootstrap their argument for Sarbanes-Oxley-Act-enforced transparency from the computer industry, whose rule of thumb is “more user-friendly, bigger program.” The anti-corporate-governance side can argue that corporate governance proponents are the “terrible simplifiers” of public companies. (This phrase came from historian Jacob Burckhardt.)