Greg Smith, Goldman Sachs, and the Death of Professionalism

Greg Smith's letter highlights a widespread and disturbing trend in American society.

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David Brodwin is a cofounder and board member of American Sustainable Business Council.

Last week, when Goldman Sachs's executive director Greg Smith resigned, he blasted his former employer's culture as "toxic and destructive." Goldman "rips off" its clients, Smith declared, allowing "morally bankrupt" people to put the firm's trading profits ahead of their clients' needs. Unless you've been living in a cave since 2008, you have to wonder if Mr. Smith isn't the last one to figure this out.

While Greg Smith's letter contains little news about Goldman itself, it highlights a widespread and disturbing trend in American society: the death of the culture of professionalism. This passing has far greater impact than its effects on any one firm, even one as big, influential, and systemically important as Goldman. The change has sweeping consequences for our economy as a whole.

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Investment banking has much in common with the fields we usually think of as professions—fields like law, medicine, accounting, and civil engineering. Society has chosen to bend the rules of free markets when it comes to professions. We expect professionals to have a higher respect for the best interests of clients than is typical in business transactions, such as selling a used car. We expect professionals to show a little less greed when weighing their potential financial gain against the well-being of their clients. In return, we look the other way when established professionals act like a cartel, and erect barriers such as licensing requirements that keep the supply low and prices high.

Our expectations of investment bankers need to be as high or higher as they are for other professionals. The stakes are enormous: The financial survival of cities, towns, and pension funds depends on long-term, client-centered thinking on the part of their bankers. Indeed the stability of our entire financial system depends on sound decision-making at the major investment banks.

The ethics failure at Goldman Sachs sadly parallels the changes taking place in other professions. In accounting, for example, the money that firms can make by selling consulting services now dwarfs the earnings from accounting services, and the lure of consulting fees gave dishonest (and now defunct) clients like Enron the leverage they needed to force auditors to approve bogus transactions.

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In medicine, some physicians have shifted from "What's best for my patient?" to "How much more cash can I make by ordering expensive tests that will be performed by a laboratory I own?" A 2009 study compared medical costs in two Texas counties with very similar demographics—but wildly different healthcare expenditures. The investigation found that the only factor that could explain the cost difference was whether the physicians had a patient-first culture or a profit-first culture. (Worse, healthcare outcomes were no better in the county that spent more!)

Without strong professional ethics, costs skyrocket and performance deteriorates. Sometimes these consequences fall on the client (or patient) directly; sometimes they harm the taxpayer or society at large, as when major banks need a government bailout due to excessive risk-taking and the failure of their auditors.

Professional ethics can't be imposed by law or regulation; they depend on character, culture, and compensation systems. If people have strong incentives to "bend the rules," unethical behavior follows. No easy answers exist. Professions and professional societies need to raise their ethical standards and bring more pressure on individuals who violate them.

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Should professionals fail to meet this challenge, they will face more regulation and litigation. For example, if physicians don't insist that patient care takes precedence over profit growth, the result will be more stringent "guidelines" dictating what tests and procedures are allowed under what circumstances. And so, the more physicians slip the shackles of patient-centered care, the more they will find themselves snared by rules and litigation that ultimately leave them less free to practice than before.

The market calls us to pursue every opportunity, but overzealous pursuit unfettered by a sense of business and professional responsibility harms both the professional and his or her client. That is the ultimate irony.

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