Ph.D. Octopus

Politics, media, music, capitalism, scholarship, and ephemera since 2010

Quitting Goldman Sachs and the Logic of Capitalism

with 6 comments

by David

The internets is all abuzz about a fellow named Greg Smith, a former executive director of Goldman Sachs who publicly announced his resignation for the firm on the op-ed pages of the New York Times. Smith argues that while the firm used to be a place with a “culture” that “revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients,” it has become a place dedicated solely to making more and more money. “Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.” He writes of attending “meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them.”

While most readers, I think, have rightly praised Smith for his decision, others have been somewhat critical, pointing to the fact that he quit only after receiving his latest bonus, or that his op-ed reads like a cover letter for his next job application, particularly this paragraph:

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

The mention of the Maccabiah Games is especially amusing. Still, though I also applaud Smith, this Star Wars parody of the op-ed expresses my sentiments well.

Seriously, was Goldman Sachs ever really a place with that culture of honesty, “revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients”? Does anyone think “humility” and associate that with Goldman, or any investment banking firm, or really any high-level finance job on Wall Street? I think the first word most of us think of is “douchebag.” I’m sure that even when Goldman and Sachs were 19th century German-Jewish immigrant peddlers schlepping their dry goods around America, their business motto was always about the bottom-line.

Smith should know this. He is a clearly a smart, accomplished individual. But he got a full ride to Stanford. Presumably that means no loans, no debts. Why did he go work for Goldman in the first place? Did he honestly believe that even 12 years ago, the job was about anything other than helping rich people get richer, and getting rich in the process? Or was he sucked into the elite school culture that said that I-banking and consulting are the only way to go? A culture that said that the job was prestigious, a place for the smart and talented to excel, never mind what they were actually doing.

Also, we should not single out Goldman Sachs. I’m sure Smith would have worked at a different bank if Goldman had rejected him, and that bank would have the exact same “culture,” or lack thereof.

But my real question is this: why is he surprised by this lack of integrity at Goldman? Isn’t this the logic of capitalism? Or perhaps, I should say, the flaw in the logic of capitalism? I say this as a staunch non-Marxist, even anti-Marxist.

Hear me out. I don’t think capitalism is inherently evil. But I think the idea that I’m trying to sell you something at the highest possible price that I can where you will still buy it lends itself to a sort of fraud, whether legal or not. It also makes sense to pay your workers as little as possible as long as you will still be hiring the best people.

Obviously, there are exceptions: American Apparel and In ‘N Out Burger, for example, famously pay their workers a good wage. To some degree, that’s about integrity, and justice, even if it’s also something of a branding strategy that gives the companies cache. But those businesses are still mostly about the bottom line, and they are exceptions. Goldman Sachs doesn’t run a sweat shop. It pays very well. But it does work its employees very hard, and it does so to make money, not to help its clients.

Smith is right that businesses often rely on customers appreciating the quality of their products. But with capitalism, there’s always the possibility of the con, if not something illegal, then at least something sleazy, trying to pull a fast one over the producer or the consumer. It’s a little like the “prisoner’s dilemma,” the pragmatic thing to do is work together, but there’s always the temptation to screw the other guy over.

Perhaps an even better analogy (and a nerdier one, if that’s possible) is in Plato’s Republic, specifically “Glaukon’s challenge” where Glaukon argues with Socrates that it’s better to be thought of as good than to actually be good, because being good is really about reputation and the ensuing rewards, not about actual virtue. This, I think, is the Goldman Sachs version of good. I’m not sure I know what it means to be good, or whether the answer is in Plato or the Bible or in our DNA, but I’m pretty it’s not the Glaukon-Goldman-Sachs version.

And this not-very-good version of goodness is inherent in capitalism. This is why people on the left argue that certain sectors of the economy, like healthcare or major forms of transportation, shouldn’t really be thought of as sectors of the economy, or certainly not as businesses, but as public goods and rights that the government should provide to all citizens as efficiently and effectively as possible. Or that other sectors of the economy, like banking, should be highly regulated, because though banks are businesses, their basic stability is crucial to the public good. And some people think that even banks should be nationalized.

Other things can be left to capitalism: restaurants, sofas, plasma TVs, and the like. But things that are really important, that are crucial to societal stability, need regulations to prevent the greedy Goldman Sachs Glaukons from taking over.

So good for Greg Smith for quitting. More people should follow his lead. Or not go to Wall Street in the first place. Instead they should do something cool, especially if they are into math and science, like become an astronaut or understand the nature of kindess. But let’s not kid ourselves into thinking that Goldman Sachs was ever a place of virtue and humility. And you don’t need the wisdom of Socrates to know that.

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Written by David Weinfeld

March 14, 2012 at 22:21

6 Responses

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  1. Hey, how many bronze medal ping-pong champions do you know?

    Danny Bessner

    March 14, 2012 at 22:47

  2. Basic game theory can be a bit more insightful than what you’ve written here. With the prisoner’s dilemma, for a one-shot game, the unique equilibrium is for neither player to cooperate. When you have an infinitely repeated game, the noncooperative outcome is still possible, but a cooperative outcome is also possible: you can sustain cooperation with the threat of ending up in a long-term noncooperative outcome. Game theory doesn’t offer a prediction about whether we have cooperation or not, but the theory does tell us that cooperation is more difficult to sustain when the players are impatient and more focused on short-term rewards. That result matches well with the claim that the Goldman culture became worse when the company went public, or more generally, the claim that capitalism has not worked as well for society when executive compensation became more tilted toward short-term profits with few long-term consequences for failure.

    DRDR

    March 14, 2012 at 23:25

    • Thanks for the comment DRDR, and too bad about the Harvard loss today.

      Of course you’re right that I’ve over-simplified here, though I still don’t think I’m wrong. I think this is an inherent flaw in capitalism, if not in its logic, than certainly in its practice, which is why some things are better off left to the welfare state and/or significant regulation.

      I think we mostly agree here: as there’s been less regulation to the financial sector, capitalism has been worse for the public good. But I also I’m fairly certain that the “culture” at Goldman and other banks has been douchey for a very long time. I mean, “Bonfire of the Vanities” came out in 1987, and “American Psycho” in 1990, and both parodied (or celebrated, depending how you look at it) the extreme arrogance, materialism, and douchebaggery of Wall Street, so certainly well before Greg Smith started at Goldman.

      David Weinfeld

      March 15, 2012 at 21:36

  3. This man is fooling himself. As you pointed out his resignation only came as a result of a diminishing end-of-year compensation. This is merely the manifesto of a man who was outpaced by someone squeezed out a higher margin than he. This will end up being a blip on the consumer’s radar. The clients will continue to flock to a top flight firm, and Greg Smith will forego shaping the world to be an ED at a competitor.

    Luke

    March 15, 2012 at 21:39

  4. […] a little more about our friend Greg Smith who just quit his job at Goldman Sachs, it occurred to me that Smith must have a very short memory. He claims that Goldman used to have a […]

  5. […] A few days ago, we had Greg Smith, a South African Jew who just left Goldman Sachs after working there a dozen years in New York and London, telling us how corrupt that company had become in his time there (though in fact the sleaziness goes back much further). Today, we have Toronto’s Globe and Mail journalist Tm Kiladze telling us  why he left a six-figure salary working on Bay Street for the investing arm of the Royal Bank of Canada to become a journalist for the aforementioned Globe. […]


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