[In]Securities Guest Blog: Born to be Wild by Aegis Frumento Esq

January 9, 2020

[In]Securities
a Guest Blog by
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell

Born to be Wild

In 2005, the late novelist David Foster Wallace began his commencement speech at Kenyon College with this joke: "There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says, 'Morning, boys. How's the water?' The two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, 'What the hell is water?'" Wallace's point, which he went on to make eloquently in one of the best commencement speeches ever crafted, was that it's very hard to understand your own reality when you are swimming in it. https://web.ics.purdue.edu/~drkelly/DFWKenyonAddress2005.pdf . True for fish, and true for us.

I was reminded of this fish story on Christmas day, reading Barton Swaim's editorial in the Wall Street Journal arguing that Capitalism Isn't a "System." https://www.wsj.com/articles/capitalism-isnt-a-system-11577299125. Swaim points out that to rail against the capitalist "system" is, in effect, a category error. Systems, he argues, require engineering, conscious design, planning, monitoring and regulation. By that light, socialism is a system. But he says capitalism isn't like that. Capitalism and market economies spring up from the very nature of things:

Although the term "capitalism" has long worked as a shorthand signifier for a market economy, there is a sense in which to use it at all is to accept the socialist's premise that a market economy is a consciously created system, manipulated by its creators for their own material ends. But it isn't that. . . . [A] market economy has no plan. . . . [A] modern market economy is an immeasurably confusing and constantly changing combination of associations and exchanges-not a "system" of any kind.

For us, in other words, capitalism is water.

It's a thought-provoking little piece, and I think Swaim is to some extent right. Modern market economies do spring up naturally, without planning. But Swaim seems to imply that a market economy, being a natural consequent of the human condition, is therefore not, in his words, "the corrosive, dehumanizing force it had always been." Indeed, there was little point to his essay if not to argue that engineered economies are bad and naturally occurring economies are good, because otherwise who cares if we call them "systems" or "bananas." And that is where Swaim is to some extent wrong. To see why, we need to consider some aspects of human nature. Fortunately, this is one of those areas where everything you need to know you really did learn in kindergarten.

Three facts about humans matter here. The first is that we have an instinct to trade. Our very individuality makes each of us value things differently. Once I value something you have more than something I have, I am naturally willing to trade what I have for what you have. You see this behavior in children even before kindergarten -- I traded baseball cards and my kids traded Pokemon cards, but it's the same thing. You also see it in pre-economic hunter-gatherers. In her classic description of the Bushmen of the Kalahari, The Harmless People, written in the early 1950s before they were corrupted by modern contact, Elizabeth Marshall Thomas recounts how tribesmen traded for goods, particularly tobacco, that they could not otherwise obtain on their own.

We also have an instinct to dominate. In every society, the strong lord it over the weak, and the weak submit to the strong. This seems too obvious to argue. We see it in children and in adults, in Bushmen and in ourselves.

There is, however, a third human instinct, critically important to all of us as persons, but generally considered irrelevant when speaking of economics. We have an instinct to share. The Bushmen, even those acknowledged to be dominant, share readily. Thomas observed how a clan of Bushmen shared their food: "no one, of course, contested Gai's large share, because he had been the hunter and by their law that much belonged to him. [But] No one doubted that he would share his large amount with others, and they were not wrong, of course; he did. It is not the amount eaten by any person but the formal ownership of every part that matters to Bushmen." That's what matters to children too. Toddlers may assert ownership of a thing -- "It's mine!" -- but that won't prevent them from sharing it a few moments later.

In other words, inequality is natural and inevitable -- some always have more than others, the poor will always be with us. In nature, that inequality doesn't result in undue hardship, because it is leavened by the countervailing instinct of those who have more to share their superflux with those who have less. But that is not capitalism. Capitalism encourages our instincts to trade and to dominate, and discourages our instinct to share. That is not merely a bug. It is capitalism's very essence and what makes it so wildly successful.

Modern capitalism grew out of the invention of money. William N. Goetzman very aptly titled his comprehensive history of finance, Money Changes Everything. Bushmen and kindergartners live in groups no larger than about 20. Hunter gatherers can't live in larger groups, because a given territory will only supply so much food in the wild. Larger groups require more food, hence agriculture. With agriculture came crop specialization and the need for large-scale trading, to prevent boring diets if nothing else. This led naturally to the invention of money as a medium of exchange, which made trading more efficient than it could ever be by mere barter. Finance is a technology that uses money to shift resources across time and space, allowing us to borrow from China to pay cops in New York, and from the future to buy houses, bridges, and tunnels today.

In all of this, the human instinct to share is given short shrift, reduced to an airy concept fit only for Sunday-school consumption, irrelevant to the "real world" of finance and economics. Witness the derision by some quarters of the Business Roundtable's recent Statement advocating "an economy that serves all Americans" rather than just corporate shareholders. https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans I think even Swaim might agree that capitalism's suppression of the sharing instinct is what gives it its power. Yet that suppression is also what gives it its bad name, and Swaim can't help but suspect it. He notes that capitalism "begins to exhibit the qualities of a system when its wealthiest actors are allowed to bend governmental policies to their advantage, but that is a vastly different thing." No, it isn't. It is the thing itself.

As Goetzman says, "finance reorganizes power." Like the masters of any technology, the financially strong will dominate the weak. That is natural, and there's nothing we can do about it. But capitalism without a regulator results not merely in the wealthy influencing government policy. Oppressive income and wealth inequality grows naturally from unfettered capitalism. So does corporate conduct that puts others at risk -- that victimizes others -- for the sake of profits. I'm thinking here of the likes of Boeing, ignoring safety concerns to push its 737MAX onto the world's runways, https://www.cnn.com/2019/12/23/business/boeing-dennis-muilenburg/index.html, and the Sackler family, who made and squirreled away over $10 billion from the opioid epidemic that their company enabled, https://www.bloomberg.com/news/articles/2019-12-17/how-the-sackler-family-shifted-billions-from-opioids-to-trusts. This is what unregulated capitalism excretes, and it matters little whether we call it an engineered "system" or as natural as the gastrointestinal tract.

The Tao Te Ching says, "Only he who knows what is enough will always have enough." The instinct to share that we see in Bushmen and kindergartners expresses the wisdom that even those who dominate know how much is enough. Capitalism strips that instinct, that wisdom, from modern human relations, so that no amount is ever enough even for those who have more than they could ever want. Capitalism is born and not made -- I'll buy that -- but it is born to be wild. We'll end up wildlings ourselves if we don't tame it.

ABOUT THE AUTHOR

Aegis J. Frumento

Stern Tannenbaum & Bell

Co-Head, Financial Markets Practice

afrumento@sterntannenbaum.com

380 Lexington Avenue

New York, NY 10168

212-792-8979

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.

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