Free Trade, Carrier, and Social Capital — Trust in the Marketplace

As discussed in my prior post, free trade commitments produce winners and losers based on diffused decisions in the marketplace, rather than centralized government choices. The capacity of government to redistribute creates a market for influencing those decisions. This likely explains the fact that the Washington, D.C. metro area has the largest concentration of so-called “super Zips”, which reflect where high-earning individuals live. Brokering that redistribution apparently pays very well. (For more on this topic, see this story and interactive map: . And that compensation likely comes from the rest of us.

Samuel Gregg lays the foundation for resisting a regime in which government is empowered in this way in his recent insightful essay, Crony Capitalism: Inefficient, Unjust, and Corrupting, (March 24, 2016). Gregg points out that crony capitalism is not merely a problem of authoritarian regimes, but it can also thrive in democracy. It often results in redistribution that favors the connected class, rather than benefitting the common good. Economic liberalization limits opportunities for politicians to provide these goodies in exchange for political support. Shrinking government’s power also shrinks the power of the special interest and the lobbying class. (That is probably not good for my people, the lawyers who often populate the lobbying class. But it would be good for the country.)

One important clarification needs to be made about free trade commitments. The fact that we allow the private sector to make decisions about where to produce, what to produce, and where to source their purchases, does not mean that these decisions are free from other moral considerations.   In fact, those other moral considerations are playing heavily into the reason that a departure like that announced by Carrier causes so much consternation.

As Francis Fukuyama explains in Trust, his seminal work on the role of social capital in economic life, economic life and social capital are inextricable intertwined: “[O]ne of the most important lessons we can learn from an examination of economic life is that a nation’s well-being, as well as its ability to compete, is conditioned by a single, pervasive social characteristic: the level of trust inherent in the society.” (page 7).   Economic activities of any scale require human beings to collaborate. Trust makes that collaboration possible.

Moreover, economic activity is not an end in itself. It is ultimately directed toward human good, meeting needs and wants with goods and services. (Why do we call tangible things “goods”, if they are not designed for our benefit?) Humans possess dignity that is expressed through meaningful work, producing things that their fellow humans need. As Fukuyama explains, work and the fruits of labor, including money, are forms of recognition, as well as the source of satisfaction of material needs. And that recognition comes from a community. Solidarity with that community can provide important benefits, which cannot be ignored.

When a company like Carrier decides to outsource production, many will justly view that as a breach of a social contract between the workers and the company. This produces mistrust, which can be magnified by other behavior, such as executives profiting while their fellow workers lose their jobs. The result is greater division between workers and administrators, rather than solidarity. Fukuyama provides several examples in which companies made decisions to protect their workers, which resulted in long-run benefits, including greater espirit de corps, cooperation, innovation, and productivity.   The pursuit of self-interest does not equate to advantage without considering the consequences on these relationships.

Outsourcing is the product of people making choices, sometimes choices with which we will disagree. Will government make better choices than private enterprises? We cannot go that route without fueling a fire which empowers government to do these things. Changing the identity of one’s employer – working for the government instead of the private sector – does nothing to change the risks of bad decisions. There is a role here for voice in the private sector, including the voice of board members and those who choose them.

Carrier will likely pay a price for its decision, which can be seen in the loss of social capital. It may experience problems with other workers, who see that the company is willing to throw them under the bus if it means extra profit. (Of course, sometimes that may be inevitable – if goods cannot be made profitably, changes must occur. Even the best of intentions cannot prevent some disruptions that come from market forces.)   The public may also choose to reject Carrier products because of its decision. Ironically, as noted in my previous post, Carrier touts its record of “sustainability” in environmental matters. But is “sustainability” also a feature that could describe a commitment to the community in which one conducts business? Query whether we might benefit from a signaling mechanism that would more clearly transmit information about policies, commitments, and practices regarding employment and community development.   My colleague Vasant Raval and I have a working paper in this area, which I will discuss in a future post.

The Institute for Economic Inquiry is co-sponsoring an symposium, “Growing Trust in the Marketplace, which will be held on April 22, 2016, in the law school on the Creighton campus. This symposium will take up the matter of trust and social capital in economic life. See the IEI website for more information, under the “events” tab. Preregistration is required if you would like to attend the lunch. Here is a link: . I will be discussing the symposium tomorrow morning with Jeff Beals on the Grow Omaha show at 9:25 a.m. on KFAB radio (1110 a.m.)