EXECUTIVES, THE ECONOMY AND A 17TH-CENTURY CATHOLIC PHILOSOPHER

Who would have thought that the works of a 17th-century French, Catholic philosopher would provided some insight into today’s economic situation, and, more unlikely, provide reason for optimism?

Good advice is where you find it. Executives should cast a wide net for wisdom. Enter 17th century scientist and Catholic philosopher Blaise Pascal, with thinking that executives may find useful as they position their enterprises in this economy.

My undergraduate degree is in mathematics and physics, awarded by the Jesuits at Loyola of Montréal. I remember Pascal’s name from a number of courses: Pascal’s Triangle in algebra; his work in analyzing gambling situations that led to probability theory; Pascal’s Theorem in geometry; Pascal’s Law relating pressure in a fluid to fluid density and fluid elevation. In the matter of the latter, few days at college brought me more sheer joy than the end of the course in fluid dynamics. The only thing I remember is that it was just plain hard. To help his tax- accountant father, he invented a mechanical adding machine, the “Pascaline.” He also invented the syringe and the hydraulic press.

The Jesuits were big believers in a well-rounded education, so in addition to our major area of study, all students were required to take three full courses in philosophy and three full courses in theology. Here I met Pascal again. Such a requirement for students, regardless of specialization, is unheard of today but it did serve to introduce you to areas of thought and inquiry you would never encounter otherwise. I feel fortunate now that I had such an education, though I was less enthusiastic during my school days.

Pascal is best known in philosophy for Lettres Provinciales and Pensées. Pensées is regarded as one of the great works in French literature. There we find Pascal’s Wager, which can be twisted into an economic framework.

Pascal’s Wager makes a case for believing in God when God’s existence cannot be proven by evidence and analysis. The wager in its simplest form runs thusly: If I believe in God and there is a God, I will have infinite happiness in heaven in eternity. If I believe in God and there is no God, the effect on me is zero. If I do not believe in God and there is no God, the effect on me again is zero. If I do not believe in God and there is a God, the cost to me is infinite because my soul will be lost in eternity. Pascal’s conclusion: whatever the probabilities of there being a God, believe.

Not surprisingly, an appeal to faith based on self-interest did not endear Pascal to Catholic purists of the day. The fate of those that had never heard of God was also a problem for his critics. In any event, you can see why Pascal was in on the ground floor of probability theory.

Executives face their own version of Pascal’s Wager when it comes to having faith in the economy. As with the existence of God, the course of the economy cannot be proven before the fact with evidence and analysis.

Apologies to Pascal whose interests were of a higher order than crass commerce, but here is a version of his wager on having faith in the economy. If an executive is optimistic about the economy and acts accordingly, and the economy ends up being fine, the benefits should be considerable.

If an executive is optimistic about the economy and it ends up being terrible, the losses will be huge. But, and this is key, if the economy is terrible, most everyone else will experience huge losses too. Additionally, you can be sure that government will throw everything at the economy it can muster to get it going again, including zero interest rates, massive stimulus spending, huge deficits, tax cuts, a low currency and corporate bailouts. Your circumstances will be terrible but you will have lots of company and the deep pockets of government will be trying to save everyone it can. For proof that government will go this route in a terrible economy, just consider what it has done since September 2008.

On with Pascal. If an executive is not optimistic about the economy and the economy ends up being fine, the gains will be very modest compared to the gains of others who were optimistic. The executive will be in the position of explaining to investors how pessimism left a lot of money on the table and caused them to miss a good boat that many others caught.

The actions of U.S. retailer Montgomery Ward after the second war is such an example. The then president, Sewell Avery, was pessimistic, believing a return to depression was likely. Montgomery Ward retrenched, closed stores and curtailed new-store investment. Sears and others took the optimistic approach and expanded aggressively. They were off to the races. By the time Montgomery Ward believed in the sustainability of the recovery, the damage was done. Being pessimistic when your competitors are optimistic can have disastrous results.

Finally, if an executive is pessimistic and the economy actually is terrible, there will be the satisfaction of being right. But that will be about it for wins because if the economy is terrible, there is really no place to hide, whatever you do. A really terrible economy is a nightmare for all, even the most prescient. A nightmare is a certainty, its degree the only uncertainty.

This, of course, is all too simplistic. Pascal must be spinning in his grave. But it sure seems the expected outcomes favour the optimist. To summarize: If the economy is terrible, whatever you do is going to be terrible for you, whereas if the economy is good, you will miss out on a lot of gains with the pessimistic approach. Therefore, thinking positively, all other things being equal, has some benefits.

I am not selling rose-coloured glasses. I can sure see why executives might be apprehensive about this economy’s prospects. It is certainly not clear how massively indebted consumers, homeowners and governments can digest a return to something approaching normal interest rates and balanced budgets. Nor am I making the case that executives should not aggressively protect the downside, especially when the economy is problematic. What I am selling is thinking through the pluses and minuses of a bias on the economy to the optimistic and pessimistic. Optimism has a good feel to it.