Can Disobedience Save Wall Street?

Ethics Newsline®
May 3, 2010 8:48 PM
by Carl Hausman

by Rushworth M. Kidder

Last week was a turbulent one for Goldman Sachs, the Wall Street giant accused of deceiving its clients during the recent housing-market meltdown. On Tuesday the firm took a drubbing from the Senate Permanent Subcommittee on Investigations. “I don’t know if Goldman has done anything illegal,” Arizona senator John McCain said during the April 27 hearing, but “there’s no doubt their behavior was unethical.”

By May 1, however, Warren Buffett, chairman of Berkshire Hathaway, was speaking out strongly in Goldman’s support. Yet his vice chairman, Charles Munger, pointedly noted the difference between law and ethics. As Munger explained to participants at Berkshire’s annual meeting, simply following the law isn’t a high enough standard for business conduct.

That raises a logical conundrum. Why, in a nation of laws, shouldn’t it be enough simply to be legal? Why should businesses need something more?

The conventional wisdom is that the law can punish disobedience, but it can’t compel obedience. In fact, the reason that ethics must trump legalism is not that people aren’t obedient, but that they’re too obedient — to the wrong thing. If you doubt that, go back to Stanley Milgram’s famous experiments at Yale University in the 1960s.

Prof. Milgram paid volunteers to participate in experiments that, he told them, were about memory and learning. Each volunteer would sit in a control room with only the “experimenter” present — a stern, impassive figure in a gray lab coat. The volunteer was told to ask questions of a “learner” in the next room, who could be heard but not seen. Whenever the learner gave the wrong answer, the volunteer was instructed to press a button giving him an electric shock. The shocks, it was explained, started off with a small tingle. But for each wrong answer, the voltage increased by 15 volts, finally reaching a massive 450-volt charge.

In fact, no shocks were ever administered: The button was a dummy. The learner in the other room was an actor, playing a tape recording of howls of pain whenever the button was pushed and banging on the wall when the “voltage” became unbearable. The experimenter was there to keep insisting that the volunteer continue administering the “shocks,” no matter what qualms the volunteer expressed.

Before beginning the experiments, Milgram recalls, he estimated that only a small percentage of volunteers would deliberately inflict pain. To his amazement, more than two-thirds did so — a figure replicated in later studies.

Reflecting on his results, Milgram noted that when “stark authority” (the guy in the lab coat) was pitted against the “strongest moral imperatives against hurting others” held by the volunteers — and despite having their “ears ringing with the screams of the victims” — authority usually carried the day. “The extreme willingness of adults to go to almost any lengths on the command of an authority constitutes the chief finding of the study,” he noted.

Now, I’m not suggesting that Goldman’s senior executives are modern-day equivalents of the guy in the lab coat. I’m not saying that bank CEOs all across the nation explicitly ordered their lending officers, against their qualms, to keep writing mortgages for people they knew would default. I’m not saying that Wall Street brokers, their ears ringing with howls of anguish from defaulters, sadistically bundled these mortgages into derivatives — and then bet against them — because they liked inflicting pain.

No, what Milgram questioned was something bigger: the role of blind obedience to authority. At Yale, the authority kept saying, “Press the button.” On Wall Street, it keeps saying, “Make lots of money.” When scruples arise, it repeats even more forcefully, “Your job is to keep making money!”

Given that pressure, who can resist? “Ordinary people,” Milgram concluded, “simply doing their jobs, and without any particular hostility on their part, can become agents in a terrible destructive process. Moreover, even when the destructive effects of their work become patently clear, and they are asked to carry out actions incompatible with fundamental standards of morality, relatively few people have the resources needed to resist authority.”

As Congress moves forward with financial regulation, it needs to keep Milgram in mind. It needs to recall that those volunteers at Yale did something perfectly legal but frighteningly unethical — and did it in droves. It needs to remember that somewhere in the dim shadows of Wall Street’s control room stands the Great Experimenter, demanding obedience to the goal of making money at all costs. Into that room, sheeplike and obedient, flow cadres of young recruits — Milgram’s “ordinary people” — fresh from business schools. Did their educations give them “fundamental standards of morality”? Do they recognize any part of their work as “incompatible” with those standards? If so, have they been given the “resources needed to resist authority” — the moral courage to stand up against the Great Experimenter?

The financial industry clearly needs legal regulation. What it needs even more is moral courage. Congress faces an unprecedented challenge. It must use its authority to give an entire sector of our economy “the resources to resist authority.”

Can Disobedience Save Wall Street?

©2010 Institute for Global Ethics