The Philosopher’s POV: Margin Call

November 18, 2012 No Comments

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Capitalism sounds like a good system. It’s based on the idea that free markets benefit all. If I grow only tomatoes and you only cucumbers, we can come to the market and trade what we grow so that both of us can enjoy a nice tomato-cucumber salad. Of course, it would be wrong of me to bring nice looking tomatoes to the market that I know are rotten inside, not tell you that they are, and then trade them to you for your wonderful cucumbers. In Margin Call, the firm headed by John Tuld (Jeremy Irons) brings rotten tomatoes to the market and sells them to unsuspecting buyers. Sam Rogers (Kevin Spacey) says to John, “And you’re selling something that you know has no value.” This makes for an easy call. It was wrong of the firm to sell those worthless bundled loans to clients who did not, and could not, know better. In addition, it was wrong of Tuld to order their sale and of Sam to facilitate their sale. If the sales people on the floor knew that what they were selling was worthless, it was also wrong of them to participate in the plan.

Does capitalism condone this sort of behavior? No, it doesn’t. The idea behind capitalism is that any distribution of goods that results from exchanges that do not involve force or fraud are just. It does not say that the distribution of goods when fraud is involved are just. It does not say that if I twist your child’s arm until you give me all your cucumbers, the resulting distribution is just if I give you one tomato in return. So we can’t criticize capitalism because sometimes people misbehave in a capitalist society and behave in ways that capitalism does not condone.

But we can criticize capitalism for encouraging bad behavior. That’s because it encourages people to act only in their self-interest. It encourages firms to maximize their profits, and sometimes that can be done only by selling others tomatoes one knows are rotten.[1] It encourages individuals in firms to further their self-interest. And sometimes that can be done only by ordering others to sell tomatoes one knows are rotten. Sometimes an individual in a firm can promote his self-interest only by betraying others, even those who have been friends, or by lying or pointing the finger of blame at others. And capitalism encourages people to make money, and to treat the making of money as an end in itself, when really it is only a means to ends that have intrinsic value. The love between a dog and his master has intrinsic value, but money does not. In short, capitalism encourages vice, even if that is only a side-effect of the system.

Further, is capitalism’s fundamental principle of justice correct? Is it true that any distribution of goods is just if it is the result of exchanges that do not involve force or fraud? I think not. Suppose I can only grow tomatoes and a few other crops on my land (say, peppers and cacti), but that you can grow a large variety of crops on yours (say, cucumbers, cantaloupes, strawberries, etc.). Suppose a lot of other people are in the same boat as I am and only a few have land like yours. So when we all come to the market, you can demand a high price for your produce, which is relatively scarce, while mine sells for much less. Is it fair that you are rich and I am poor as a result of conditions beyond our control, namely, due to the difference in the fertility of our land? I think not.

You might be wondering what this has to do with capitalism. The answer is that some people were born with native endowments that, when developed, are in demand and some were not. Some were born with enough brains to become a rocket scientist and some only with the ability to become a janitor in a fancy high-rise where a wealthy firm has its offices. If it is not fair for the person born onto fertile land to become rich and the person born onto infertile land to become poor, it’s also not fair for people to become rich or poor as a result of their native endowments, for which they are not responsible. But in a capitalist system, that is just what can happen since many were born with talents that can only be developed in ways that do not earn them much money, given that there are many others who were born with similar talents. Force or fraud need not be involved for a resulting distribution of goods in a free market to be unfair.

You might be asking yourself, “But what about effort? Shouldn’t those who put forth more effort get more? Shouldn’t the small businessman who works 100 hours a week get more than someone who just takes it easy and works 30 hours a week?” Even if that were true, rarely will the free market distribute goods accordingly. On this view, the janitor and the executive that both work 100 hours a week should make the same, but in a free market they won’t because there is not the same demand for their labor. Further, shouldn’t those who work harder get more, even if they do not work longer hours? So maybe the janitor and the farm laborer who work 100 hours a week should get more than the executive because their work is harder. A free market that does not involve force and fraud will not yield that result if the executive is more in demand than the janitor and the farm worker.

Perhaps the defender of capitalism will reply that the janitor and the farm worker are better off if the executive gets more because if he did not, the firm would be poorly run, would eventually go bankrupt, and then there would be no job for the janitor, or for the farm worker if the firm sells agricultural products. This reply suggests that some inequalities should be allowed, for allowing them benefits all. But the reply does not justify the inequalities that a free market permits, even one without force or fraud. All the reply establishes is that the executive should receive just enough to give him the incentive he needs to willingly run the firm, which often is not the same as what he can command in the open market for his services. In the open market, he might be able to command a salary of 10 million per year, but he would do the job for a mere million! So the free market gives him much more than he needs as an incentive to do the work.

In 1971 John Rawls, a philosopher at Harvard, published perhaps the most famous philosophy book of the 20th century titled, A Theory of Justice. In that he defended what he called the Difference Principle. Roughly, it says that inequalities in income and wealth are permissible if, and only if, they do not lower anyone below a benchmark of equal income and wealth and benefit most the least well off in society. We have seen that there is reason to allow some inequalities because allowing them benefits all. But some inequalities benefit most one segment of society and others benefit most other segments, even if both sorts of inequalities benefit everyone to some degree. Which inequalities should we allow if none benefits all the segments equally?

Rawls argues that principles of social justice are those that people would choose from behind a veil of ignorance while being motivated to successfully pursue whatever their rational life plan is. The veil of ignorance prevents them from knowing any particulars about themselves and is supposed to make the choice impartial. Behind the veil, you don’t know whether you are young or old, female or male, smart or dull, have abilities that are in demand or do not, etc. You only know general facts about the world.  Rawls thinks that in that choice situation people would choose a principle that allows for some inequalities in income and wealth, since those are needed to create incentives, but that they would choose a principle that allows only inequalities that most benefit the least well off while at the same time leaving none below the benchmark of equality. Being behind the veil of ignorance, people do not know whether they will turn out to be rich or poor once the veil is lifted, and they want to guard against the worst outcome, namely, being very badly off by being poor.

If we accept Rawls’ reasoning about the basis of principles of social justice, and his view that the Difference Principle determines a just distribution of income and wealth, then the capitalist principle of just distribution must be false, for it says that any distribution of goods that results from exchanges that do not involve force or fraud is just. That capitalist principle of justice allows distributions of goods that are prohibited by the Difference Principle.

If the Difference Principle is a correct principle of social justice, would it be unjust to tax the wealthy at a high rate, say, a rate much higher than 39%? It would not be unjust if taxing at that high rate still left the wealthy with enough incentive to willingly do the work needed to benefit all, especially the least well-off. According to Rawls’s principle, they would not be entitled to all the income and wealth they possess just because they earned it through exchanges that involved no force or fraud.

A similar point can be made intuitively. The positions we occupy in society and the income and wealth we possess are a function of two things: (1) things beyond our control such as our native endowments, the social situations we were born into, the education and nurturing we received from others, and (2) things within our control, such as our own efforts and choices. Insofar as the positions we occupy and the income and wealth we possess are a function of things beyond our control, we cannot claim that we are entitled to them. So we cannot complain if that portion of our goods is taxed at a high rate for a good reason. The only reason it should not be so taxed is that it will reduce incentive and make everyone worse off as a result. But the capitalist principle of justice implies that it is unjust to take the fruits of my labor from me if I have acquired them without force or fraud.

In the film Sam sounds like a moral relativist when he answers Peter’s question about whether they are doing the right thing with another question, “For who?”[2] But when my students say such things as “it was right for X, but not right for Y to stone to death the woman who was raped”, I point out that all this means is that X believes it is right and Y believes that it is wrong. Whatever their beliefs, there is some fact of the matter about the action’s rightness or wrongness, and at least sometimes reason can tell us what it is. For instance, it’s just wrong, period, to knowingly sell rotten tomatoes to someone who has no reason to believe they are rotten. Not only does capitalism indirectly encourage people to knowingly sell rotten tomatoes to the unsuspecting, it encourages people to be rotten to their fellow workers in win or lose situations. It encourages people to think they are entitled to things when they are not, and to complain about unfair taxation that robs them of the fruits of their labor when the taxation is not unfair and does not rob them of anything. There is nothing wrong with free markets as long as the outcomes of the exchanges are periodically adjusted in the interest of justice.

Margin Call is a wake up call to the moral shortcomings of capitalism. At the end of the film, Sam buries his beloved dog. That’s the buried treasure that he leaves behind to chase after fool’s gold at the cost of his character. He listens to the call of capitalism and is deaf to the call of conscience. Like a Ulysses unfettered, he hears the Siren’s call and heads straight for destruction.

John Tuld’s (Jeremy Irons) argument to Sam Rogers (Kevin Spacey) that what they did was not wrong:

John: (1:36.12) So you think you might have put a few people out of business today. That it’s all for naught. But you’ve been doing that every day for almost 40 years, Sam. And if this is all for naught, then so is everything out there. It’s just money. It’s made up, pieces of paper with pictures on it so we don’t have to kill each other just to get something to eat. It’s not wrong. And it’s certainly no different today than it’s ever been. 1637, 1797, 1819, 1837, 1857, 1884, 1901, 1907, 1929, 1937, 1974, 1987. Jesus. Didn’t that fucker fuck me up good? 1992, 1997, 2000 and whatever we want to call this. It’s all just the same thing, over and over. We can’t help ourselves. And you and I can’t control it or stop it or even slow it. Or even ever so slightly alter it. We just react. And we make a lot of money if we get it right. And we get left by the side of the road if we get it wrong. And there have always been and there always will be the same percentage of winners and losers, happy fucks and sad sacks, fat cats and starving dogs in this world. Yeah. There may be more of us today than there’s ever been. But the percentages, they stay exactly the same.

Sam: I’ll do it, John, but not because of your little speech. But because I need the money. Hard to believe after all these years, but I need the money. (1:38.24)

bruce.russell@wayne.edu

 


            [1]Relevant here is a new book by Greg Smith titled, Why I Left Goldman Sachs: A Wallstreet Story. On 60 Minutes on October 21, 2012 Smith said, “Getting an unsophisticated client became the ‘golden prize’ because the ‘quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.’”

            Seth Bregman (Penn Badgley) asks Peter Sullivan (Zachary Quinto) what he thinks Will Emerson (Paul Bettany) made last year.  Seth says it’s 2.5 million. Peter says, “That’s fucked up.” Seth: why is that fucked up? Peter: I don’t know, does it seem right to you? Seth: Right? I mean, right is…Right is…. On NPR, Barry Schwartz said that if you asked a banker whether what he is doing is right, he wouldn’t know what you are talking about. He’d think you were asking whether it maximized profits.

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Dr. Bruce Russell received his PhD in philosophy from University of California-Davis.  He is a philosophy professor at Wayne State and a past chairman of the department.    His areas of interest include ethics, epistemology, morality, the philosophy of religion and the problem of evil.  Dr. Russell has written extensively about film and continues to explore the cinematic world through a philosopher’s lens.

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