Tuesday, June 2, 2009

Guilt versus Shame

The West’s Judeo-Christian moral ethic constitutes a long-term economic advantage over economic cultures based on Confucian ethics. Judeo Christen morality is based on guilt, forgiveness and redemption. At its core, guilt is a much more evolved form than shame. Shame is tribal; it represents “I am bad” Guilt is a delimited feeling “I have done something bad”.

Guilt is more effective at guiding positive economic behavior in comparison to the decisions made in “Shame” focused cultures. Guilt motivates conscious actions for forgiveness, resolution and redemption. This is a cycle based on problem-recognition, decision-making and solution-focused action. It’s an economically healthy cycle, and one which fully embraces of the art and mystery of “creative destruction” a process vital for persistent economic growth.

The guilt system works because it rewards action for admitting fault (confession of guilt), forgiveness (for acknowledging errant ways), redemption (the hope and action - for a better tomorrow, and opportunity (to pursue that future including debt forgiveness, bail-outs, et al.) Guilt, by the cleansing action of acknowledgment and its by-product, action, more often than not, produces economically healthy, future-focused, decision-making. Perhaps not in all cases (think General Motors)–but usually.

Confucian culture suffers from decision delay and the tribal ideal of “saving face”. Positive action is obfuscated. With little incentive to admit fault, the system fails to correct, mature and advance.

Consider the rhetoric of the late 1980s. Japan was going to take over the world. The Japanese had mastered production and quality control in many industries. But long-term economic strength is not founded on the basis of several industries; it is founded on values and work ethic. No number of industries can sustain a nation over time, because industries, by definition, are mortal. They expire. (Think of the buggy whip, the carriage wagon, the PC industry.) All lines of business must transform themselves over the generations, simply to continue to exist. Transformation requires an admittance of difficulty, fault, blame and corrective, strategic action to adopt–or die. As Andy Grove stated “only the paranoid survive”.

The Japanese production dominance of the 1980s was similar to the German war-making dominance in WW2. But mastery in several industries, was not sustainable over time, because technological innovation and creative destruction, rendered certain industries and technology, insufficient. Case in point, the H-bomb made the perfection of the blitzkrieg and the surprise attack, mute.

The Christian response to economic calamity and asset bubbles particularly, is much different than the Japanese response in the 1990s. I bring this up because I’m coming to believe that the predicted demise and doom saying, so widespread, prevalent and gloating, is an increasingly myopic vantage point. China has a fatal banking problem. This may be one of the reasons that China makes surprisingly little headway developing a consumer economy.

Bottom-line: The predicted demise of the American economy is wrong. Southeast Asia has a radically different ethic that does not support long-term growth, due to the absence of self-correcting mechanisms.

Fast forward two months. Its June now, and the market is telling whomever will listen, that things are better than they were in the dark days of November or early March.

I’m not convinced yet, but what I do know, is that for all the abrasively transparent faults of the U.S.’s profligate ways, the American economy enjoys powerful long-term economic advantages, one of which is our self-effacing cultural value of forgiveness over denial and mea culpa over hari kari.

Daniel A. Barnes, CFA

June 2, 2009