Everything Is Obvious (30 page)

Steve Jobs may in fact be such an individual—the sine qua non of Apple. But if he is, he is the exception rather than the rule in corporate life. As sociologist and Harvard Business School professor Rakjesh Khurana argues in
Searching for a Corporate Savior
, corporate performance is generally determined less by the actions of CEOs than by outside factors, like the performance of the overall industry or the economy as a whole, over which individual leaders have no control.
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Just as with the hubs and influencers that I discussed in
Chapter 4
, Khurana concludes that conventional explanations of success invoke the power of inspirational leaders not because the evidence supports that conclusion, but rather because without such a figure we do not have any intuitive understanding how a large, complex entity functions. Our need to see a company’s success through the lens of a single powerful individual, Khurana explains, is the result of a combination of psychological biases and cultural beliefs—particularly in cultures like the United States, where individual achievement is so celebrated. The media, too, prefers simple, human-centered narratives to abstract explanations based on social, economic, and political forces. Thus we both gravitate to, and are also disproportionately exposed to, explanations that emphasize
the influence of special individuals in directing the course of incredibly complex organizations and events.
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Reinforcing this mentality is the peculiar way in which corporate leaders are selected. Unlike regular markets, which are characterized by large numbers of buyers and sellers, publicly visible prices, and a high degree of substitutability, the labor market for CEOs is characterized by a small number of participants, many of whom are already socially or professionally connected, and operates almost entirely out of public scrutiny. The result is something like a self-fulfilling prophecy. Corporate boards, analysts, and the media all believe that only certain key people can make the “right” decisions; thus only a few such people are considered for the job in the first place. This artificial scarcity of candidates in turn empowers the winners to extract enormously generous compensation packages, which are then presented as evidence that “the market” has valued the candidate rather than a small group of like-minded individuals. Finally, the firm is then either successful, in which case obviously the “right” leader was chosen, or it is not successful, in which case the board made a mistake and a new leader is sought out. Sometimes “failed” CEOs walk away with huge severance packages, and it is these instances that tend to get all the attention. In Khurana’s view, however, the outrage that is often expressed over these instances nevertheless perpetuates the mistaken belief that a firm’s performance can be attributed to any one individual—even the CEO—in the first place. If boards were more willing to question the very idea of the irreplaceable CEO, and if searches for CEOs were then opened to a wider pool of candidates, it would be more difficult for candidates to negotiate such extravagant packages at the outset.
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Whether we can answer them or not, questions about how to differentiate luck from talent and individual contributions from collective performance can also inform our thinking about fairness and justice in society as a whole. This issue was raised in somewhat different language in a famous argument between the political philosophers Robert Nozick and John Rawls over what constitutes a just society. Nozick was a libertarian who believed that people, in essence, got what they had worked for, and therefore no one was entitled to take it from them, even if that meant putting up with large inequalities in society. Rawls, by contrast, asked what kind of society each of us would choose to live in if we didn’t know beforehand where in the socioeconomic hierarchy we would end up. Rawls reasoned that any rational person would prefer an egalitarian society—one in which the worst off were as well off as possible—over one in which a few people were very rich and many were very poor, because the odds of being one of the very rich was so small.
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Nozick found Rawls’s argument deeply disturbing, in large part because it attributed at least part of what an individual accomplishes to society rather than to his or her own efforts. If an individual cannot keep the output of his talent and hard work, Nozick’s reasoning went, he is effectively being forced to work for someone else against his free will, and therefore does not fully “own” himself. Taxation, it follows, along with all other attempts to redistribute wealth, is the moral equivalent of slavery, and therefore unacceptable no matter what benefits it might confer on others. Nozick’s argument was appealing to many people, and not only because it provided a philosophical rationale for low taxes. By reasoning about what would be considered fair in a hypothetical “state
of nature,” Nozick’s arguments also played well to commonsense notions of individual success and failure. In a state of nature, that is, if one man invests the time and effort to build, say, a canoe for fishing, no one else is entitled to take it from him, even if it means that the man lacking the canoe will suffer or perish. Individual outcomes, in other words, are solely the product of individual efforts and skill.

And in a state of nature, Nozick might well be right. But the whole point of Rawls’s argument was that we do not live in such a world. Rather, we live in a highly developed society in which disproportionately large rewards can accrue to individuals who happen to possess particular attributes and who experience the right opportunities. In the United States, for example, two equally skilled and disciplined athletes—one a world-class gymnast and the other a world-class basketball player—are likely to enjoy wildly different degrees of fame and fortune through no fault or merit of their own. Likewise, two children with indistinguishable genetic endowments—one of whom is born into a wealthy, highly educated, socially prestigious family, and the other who is born into a poor, socially isolated family with no history of educational achievement—have dramatically different prospects for lifetime success.
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Finally, even random differences in opportunities that arise early in one’s career can accumulate, via the Matthew Effect, to generate large differences in outcomes over the course of a lifetime. Rawls’s claim was that because the mechanisms of inequality are essentially accidents—whether of birth, or of talent, or of opportunity—a just society is one in which the adverse effects of these accidents is minimized.

Rawls’s claim is often misunderstood to mean that inequality of any kind is undesirable, but this is not at all what he was saying. Allowing for the possibility that through hard
work and application of one’s talents one can do better than one’s peers is no doubt beneficial for society as a whole—just as libertarians believe. In a Rawlsian world, therefore, people are free to do whatever they want, and are perfectly within their rights to take whatever they can according to the rules of the game. And if the rules of the game have it that basketball players earn more than gymnasts, or investment bankers earn more than teachers, so be it. Rawls’s point was just that the rules of the game themselves should be chosen to satisfy social, not individual, ends. Bankers, in other words, are entitled to whatever they are able to negotiate with their employers, but they are not entitled to an economic system in which the financial industry is so much more profitable than any other.

The counterintuitive consequence of this argument is that debates over individual compensation should not be conducted at the level of individuals. If it’s true that bankers are paid too much, in other words, the solution is not to get into the messy business of regulating individual pay—as indeed the financial industry itself has argued. Instead, it is to make banking less profitable overall, say by limiting how much banks and hedge funds can leverage their portfolios with borrowed money, or by forcing so-called over-the-counter derivatives to be traded on public exchanges. The financial industry could argue, of course, that leverage and customization offer benefits to their customers and to the broader economy as well as to themselves. And these claims, although self-serving, may have merit. But if the purported benefits are outweighed by the economic costs of increased risk to the economic system as a whole, then there is nothing inherently unjust about society changing the rules. We can argue about whether making banking a less profitable industry would, on
balance, be a good or a bad thing for society, but that’s what the debate should be about—not about whether particular individuals deserve their $10-million bonuses. Libertarian arguments about what would or would not be fair in a state of nature are simply irrelevant, because in a state of nature nobody would be getting a $10-million bonus.

For much the same reasons, arguments about the so-called redistribution of wealth are mistaken in assuming that the existing distribution is somehow the natural state of things, from which any deviation is unnatural, and hence morally undesirable. In reality,
every
distribution of wealth reflects a particular set of choices that a society has made: to value some skills over others; to tax or prohibit some activities while subsidizing or encouraging other activities; and to enforce some rules while allowing other rules to sit on the books, or to be violated in spirit. All these choices can have considerable ramifications for who gets rich and who doesn’t—as recent revelations about explicit and implicit government subsidies to student lenders and multinational oil companies exemplify.
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But there is nothing “natural” about any of these choices, which are every bit as much the product of historical accident, political expediency, and corporate lobbying as they are of economic rationality or social desirability. If some political actor, say the president or Congress, attempts to alter some of these choices, say by shifting the tax burden from the working class to the superrich, or by taxing consumption rather than income, or by eliminating subsidies to various industries, then it is certainly valid to argue about whether the proposed changes make sense on their merits. But it is not valid to oppose them simply on the grounds that altering the distribution of wealth itself is wrong in principle.

Arguments about the claims that society can justly make on its members are also relevant to questions of accountability. For example, a great deal has been written recently about whether the banks and other financial firms that pose a serious systemic risk should be allowed to exist in the first place.
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Much of this discussion has revolved around whether it is the size or interconnectedness or some other attribute of a financial institution that determines how much risk its failure might create for the rest of the economy. Addressing these questions is important, if only to understand better how to measure systemic risk, and hopefully to limit it through thoughtful regulation. But it is also possible that there is no way to eliminate systemic risk in financial systems, or to guarantee the robustness and stability of any complex interconnected system. Power-transmission grids are generally able to withstand the failure of individual transmission lines and generators, but occasionally a seemingly innocuous failure can cascade throughout the entire system, knocking out hundreds of power stations and affecting millions of consumers—as has happened several times in recent years in the United States, Europe, and Brazil.
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Likewise, our most sophisticated engineering creations, such as nuclear reactors, commercial aircraft, and space shuttles, all of which are designed to maximize safety, occasionally suffer catastrophic failures. Even the Internet, which is extremely robust to physical failures of all kinds, turns out to be highly vulnerable to a whole range of nonphysical threats, including chronic spam, Internet worms, botnets, and denial-of-service attacks. It may be, in fact, that once a system has attained a certain level of
complexity, there is no way to rule out the possibility of failure.
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If so, we need not only better tools for thinking about systemic risk, but also a better way of thinking about how to respond to systemic failures when they inevitably occur.

To illustrate, consider the response of the banking community to the Obama administration’s proposal to tax certain trading profits as a way to recoup taxpayer bailout money. In the bankers’ view, they had already paid back their bailout money—with interest—and therefore nothing more could legitimately be asked of them. But imagine for a moment what the banking industry profits
would have
been in 2009 absent the several hundred billion dollars of government funds from which they benefited both directly and indirectly. We can never know for sure, of course, because we didn’t run that experiment, but we can make some educated guesses. AIG, for one, would probably not exist and its various counterparties, including Goldman Sachs, would be short several tens of billions of dollars that were funneled to them through AIG. Citigroup might well have collapsed, and Merrill Lynch, Bear Stearns, and Lehman Brothers might all have been dissolved rather than merged with other banks.

All told, the banking industry might have lost tens of billions of dollars in 2009—quite the opposite of the tens of billions they actually made—and many thousands of bankers who in reality received bonuses would instead have been out of work. Now imagine that in the fall of 2008 the leaders of Goldman Sachs, J.P. Morgan, Citigroup, and the like were offered a choice between the “systemic support” world in which they were guaranteed government support and the “libertarian” world in which they would be left hung out to dry. Forget for a moment the devastation that would have been wreaked on the rest of the economy, and ask how much
of their future compensation the banks would have been willing to concede in order to not be allowed to fail? Again, it’s a hypothetical question, but with their very survival in the balance it seems safe to assume that they would have agreed to commit more than the face value of their direct loans.