Fiduciary obligation vs creative capitalism

by John Quiggin on July 24, 2008

The creative capitalism blog has been set up to examine the idea that corporations could do a job of promoting social goals like improving health in poor countries (that is, better than they do now and better, in at least some ways, than governments or NGOs). Richard Posner objects to this on the ground that corporate managers have a fiduciary obligation to maximise profits. I don’t find this convincing (reposted over the fold).

I’d like to tackle the notion of fiduciary obligation: that firms are obligated to act in the interest of stockholders or more specifically in Richard Posner’s formulation, to maximize corporate profits.

First, what is meant by obligation here? The obvious interpretation is that this obligation exists under statutory or judge-made corporate law. But if this were the main or only reason for arguing that firms should maximize profits the answer would be simple – change the law so that companies are free to take a broader range of goals into account. In fact, in many countries, such as Germany, companies are obliged to take worker interests into account, and capitalism does not appear to have collapsed as a result. But I somehow doubt that, if US law were changed to remove any obligation to maximize profits, or even to create a positive obligation to pursue broader social goals, Posner’s objections to creative capitalism would be resolved.

Alternatively, Posner argues that there is an equitable obligation to ‘keep faith’ with shareholders. As Posner says, if a company issues equity under the implied assumption that its managers will maximize profits, then decides to pursue other goals, shareholders can reasonably argue that an implicit contract has been broken. On the other hand, much of the corporate history of the US since the 1970s has consisted of the repudiation of implicit contracts with workers, and they have found little redress. In any case, such problems don’t arise for new companies, who state their policies at the outset.

So, presumably, the obligation to maximize profits is a matter of enlightened self-interest. Posner argues, plausibly enough, that a company that doesn’t maximize profits is weakening itself in competition with other firms. To be more precise, the probability of bankruptcy or hostile takeover is presumably increased by deviations from profit maximization. But this doesn’t mean that the probability of firm survival is maximized by maximizing profits. And there’s no obvious reason why socially concerned managers couldn’t conclude that the strategy that yielded them the best expected personal value, adjusted for the risk of corporate failure, was one in which the company pursued broad social goals.

If an argument is to be made against creative capitalism, fiduciary obligation seems a very weak reed. A better way of approaching the question would be to ask whether the goals of all concerned could not be better met if managers ran companies to maximize profits, maximized their personal rent from their positions (subject to appropriate legal constraints) and then used their own wealth to pursue social goals. This is broadly speaking what Gates has done: it’s the Bill and Melinda Gates foundation, and not the Microsoft corporation, that is fighting malaria.

But it’s far from clear that this neat separation will always apply. Pharmaceutical corporations, for example, face large fixed costs in developing medicines and low marginal costs in producing them. This situation creates a great deal of scope for different pricing regimes. It’s easy to describe cases where the socially optimal pricing rule is going to be very different from that which maximizes profits.

And it may well be that behaving as a good corporate citizen is conducive to long-term firm survival. This isn’t just a matter of buying PR as Posner suggests. If political actors generally regarded the activities of a firm as socially desirable, they will presumably be less likely to take action that might damage it. And while political perceptions do not always coincide with social reality, it’s hard to believe, in global terms that the strategies adopted by major pharmaceutical companies in recent decades have been either socially optimal or tailored to maximize the chances that the industry, and the firms that make it up, will survive in the long term in something like their current form.

{ 136 comments }

1

Mrs Tilton 07.24.08 at 4:30 am

I expect that, any day now, Posner will be publishing his jeremiad against the many, many firms that fail to maximise profits, not because they are feeding starving puppies, but because they are managed by the sort of rentseeking parasites whose pictures are in the dictionary margin to illustrate “agency problem”. Because I am certain his conccrn for shareholders is principled and consistent.

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Tracy W 07.24.08 at 8:31 am

A firm that is making a profit is a firm that is selling goods or services for more than the costs of the inputs. This means that its customers value the firms outputs more than they value the inputs separately. In an economic system with good property rights, this is a decent guide to say that the firm is increasing social returns. The more profits a firm is making, in a system with good property rights, the more social return it is making.

We want firms to maximise profits in order to maximise social returns.

If you want to invest in something that can’t be measured in money terms there is this long-existing organisational structure called a charity.

The question for advocates of creative capitalism is what is the advantage of combining profit-maximising with charity?

And there’s no obvious reason why socially concerned managers couldn’t conclude that the strategy that yielded them the best expected personal value, adjusted for the risk of corporate failure, was one in which the company pursued broad social goals.

I assume that by “socially-concerned managers” you mean managers who really really want to be admired by the press for their various social efforts, and to get invited to smart parties, and appear on TV next to Angelina Jolie. They of course have no obvious reason to avoid pursuing broad social goals,

Anyone however who actually wants to improve the world, rather than their social status, has a very good reason to avoid pursuing “broad social goals”. The broader the goals, the harder it is to meet any of them. Doing one thing well is hard. Adding more just gets harder and harder. There’s some point where it’s best to not add any more things, and instead focus on narrow goals.

3

Stuart 07.24.08 at 8:47 am

Tracy – so lets say my Pharmaceutical company makes a pill that can keep someone alive, and can make each pill for 1 cent. If I sell them for $1000 dollars per pill I make more profit than if I sell them for $1 per pill, and thus according to you more profit means more social returns. Somehow.

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Tracy W 07.24.08 at 8:58 am

I expect that, any day now, Posner will be publishing his jeremiad against the many, many firms that fail to maximise profits, not because they are feeding starving puppies, but because they are managed by the sort of rentseeking parasites whose pictures are in the dictionary margin to illustrate “agency problem”. Because I am certain his conccrn for shareholders is principled and consistent.

Back in April 2008 Richard Posner made the following post about agency problems – see http://www.becker-posner-blog.com/archives/2008/04/compensation_un.html

I personally would not call this a jeremiad. But then I wouldn’t call the previous post a jeremiad either. I think Posner is just one of those people who doesn’t write in a terribly-emotional over-the-top-way. So I suspect you are doomed to disappointment if you insist on a jeremiad. However, his concern for shareholders does seem principled and consistent.

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Tracy W 07.24.08 at 9:08 am

Tracy – so lets say my Pharmaceutical company makes a pill that can keep someone alive, and can make each pill for 1 cent. If I sell them for $1000 dollars per pill I make more profit than if I sell them for $1 per pill, and thus according to you more profit means more social returns.

Well they are equally alive under either scenario. That’s a good start.

The pricing of medicines is complicated because typically they have high fixed costs, and low marginal costs. At this point saying what the cost is of producing one pill gets awfully confusing. If we assume that you are producing a medicine with zero fixed costs that truly only costs 1 cent and you are in a system with good property rights, then some competitor will come in and start undercutting you. (I am skipping over the issue of what exactly is good property rights because I already write overly long comments).

If the marginal costs of making a pill is 1 cent and the fixed costs are $100 million (R&D plus getting it through approval) then we want you to be making a profit overall that is enough to pay you back for the fixed costs as well as the marginal cost.

When a firm has high fixed costs and very low marginal costs the profit-maximising response, if you can do it, is to charge the consumers with very inelastic demand a very high price and then at the other end charge the consumers with very elastic demand a very low price. This works fine with airlines. And it would be profit-maximsing for pharmaceutical companies to charge high prices to rich customers to cover their fixed costs, and low prices to poor customers.

Pharmaceutical companies however have two problems. Firstly many medicines are far more fungible than airline seats. If they sell medicines just above marginal cost in a poor country there’s a big incentive for other profit-maximisers to buy those medicines and send them back to the rich country and undercut the company’s return on fixed problems. Secondly, politicians in rich countries have an incentive to make political hay out a large price differential, and pass laws requiring companies to sell the medicine at the lowest price they do anywhere.

These are both serious problems, and I don’t see how pharmaceutical companies having multiple social goals would fix them. If the company can’t recover its fixed costs, it will go bust regardless of how caring its managers are.

6

abb1 07.24.08 at 9:23 am

I don’t get the “long-term firm survival” metaphor. A corporation is not a living thing, it’s a mechanism for generating ROI and this quarter’s returns are more valuable than next quarter’s returns. When the firm ‘dies’, typically it doesn’t mean that someone from the outside killed it, all it means is that the shareholders found a better mechanism to get their ROI. “Survival” simply is not a goal, not an objective. If you can find me a firm that will double my capital in a day and die, that’ll be the best firm ever.

7

Harl Delos 07.24.08 at 9:40 am

The internal revenue code says that a business is an activity systematically engaged in for the purpose of profit. The charter of a corporation specifies whether it is a for-profit corporation, or a not-for-profit corporation.

Arguing that a corporation exists for any other purpose is like arguing that a pig would be a duck, if it waddled, quacked, swam, was hatched from an egg, and had ducks for parents – but if all those were true, it wouldn’t be a pig.

In Matthew, it says “No one can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other.” That’s not true because it’s in the Bible; it’s in the Bible because it’s true.

Corporations provide a market for goods and services (including the labor of its employees) and in turn, produce goods and services. There’s nothing evil in that; in fact, many communities would like to have more corporations nearby.

The best way to improve health in many countries would be to provide safe water and food, and provide transportation so that safe water and food can reach everyone. There’s no reason why this cannot be engaged in for profit; indeed, if it is profitable, the corporation will want to do more of those same things. And along the way, the corporations will end up hiring local employees, not only providing those people with an income, but giving them important job skills. Some of the employees will end up quitting to start entrepreneural enterprises that use those skills – and their enterprises will be much more successful if they have learned how to do well by doing good.

We ought not be giving men fish; we should be teaching them how to fish, so that they’re good customers, buying six-packs at our bait shops.

8

ejh 07.24.08 at 9:55 am

“Maximising profits” is a bit of an old red herring though, isn’t it? What does it mean? Does it mean maximising them in the immediate future? If it doesn’t, what does it mean? Isn’t there a strong case that rather than restricting the options of the managers, it gives them quite a lot of leeway to decide what will be best for the company in the long term, and that improving the company’s image by pursuing social goals may be among the options they may wish to consider?

I know this isn’t an original observation, but that’s my point, really – that the question is, and is accepted as being, open to discussion. A company may surely decide that it wants to make as much money as it can right now, provided it remains within the law, but we surely accept in practice that the shareholders are not being legally or ethically betrayed if it chooses to take a longer and a broader view. To try and make the divide between “for-profit”, which demands we act in a certain way, and “not-for-profit”, which demands we act in another way, is to obscure that practical reality.

9

Katherine 07.24.08 at 10:02 am

For information, there is an “obligation” for companies in the UK also to look after the interests of employees, contained within the Companies Act. When I was studying company law, the supervisor considered that this could be used, at best, as a defence against shareholders complaining that the directors hadn’t acted in their (the shareholders’) best financial interests.

Now, fair enough this was well over 10 years ago, but the existence of this provision didn’t and doesn’t seem to have created a paradigm shift in corporate policy towards profits, shareholders and employees.

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Tracy W 07.24.08 at 10:07 am

but we surely accept in practice that the shareholders are not being legally or ethically betrayed if it chooses to take a longer and a broader view

I am not sure who you are aiming this argument at. It is widely accepted that organisations can be set up that aim at goals other than profit-maximising, short-term or long-term. The Red Cross has been a charitable organsation for over 100 years and I don’t know anyone who feels legally or ethically betrayed because of that (though the Internet being the Internet I’m sure you could find *someone*).

The relevant question for me is not legal or ethical betrayal, but whether an organisation that tries to both maximise profits in the long-term and pursue some other goal will do more to maximise social return than two separate organisations, one who pursues profits, one who pursues the other goal. I am inclined to think that having one organisation trying to do both would lead to worse outcomes, but I do not think that just because the supporters of creative capitalism disagree with me about the practical benefits that it is therefore right to accuse them of ethical betrayal. I suspect they are acting in good faith.

To try and make the divide between “for-profit”, which demands we act in a certain way, and “not-for-profit”, which demands we act in another way, is to obscure that practical reality.

The argument to me for making that divide is that life is too complicated if we don’t draw some boundaries, even if the boundaries are somewhat arbitrary. It is better to have for-profit firms that focus on making medicines, and other for-profit firms that focus on growing food, and charities that focus on removing cataracts from poor people’s eyes and other charities that focus on providing clean drinking water, rather than one organisation that tries to do everything. Making medicines is different to growing food is different to providing clean drinking water is different to removing cataracts, even if I cannot pinpoint the exact boundaries. At some point trying to cover more and more means an overall loss of effectiveness.

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ejh 07.24.08 at 10:12 am

Well, I’m sorry that life is complicated, but it is. If we try and draw lines that exclude those complications, the complications exist nevertheless.

I am not sure who you are aiming this argument at. It is widely accepted that organisations can be set up that aim at goals other than profit-maximising, short-term or long-term. The Red Cross has been a charitable organsation for over 100 years

How many shareholders has the Red Cross got?

12

Tracy W 07.24.08 at 10:19 am

Well, I’m sorry that life is complicated, but it is. If we try and draw lines that exclude those complications, the complications exist nevertheless.

Actually I think they are diminished. If I draw a line and say “I grow food, I don’t do cataract operations or design wind turbines”, I can focus on growing food. If I tried to do absolutely everything that makes life better off I would have no time for sleep and would still have not covered 1% of the list.

How many shareholders has the Red Cross got?

Everyone who donates to them strike me as equivalent to shareholders in a profit-making companies. Though this is most definitely not a legal definition.

13

Shashank 07.24.08 at 10:19 am

Tracy W: “The more profits a firm is making, in a system with good property rights, the more social return it is making.”

Or, of course, the larger are its supernormal profits by virtue of its ability to collect rent. I recognize that the proviso of ‘good property rights’ is meant to address this, but is it fair to begin with a presumption of perfectly internalised costs? And if there are significant market imperfections, why not attempt to legislatively intervene in order to usefully direct the rent that would otherwise accrue to one category of people?

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ejh 07.24.08 at 10:32 am

If I draw a line and say “I grow food, I don’t do cataract operations or design wind turbines”, I can focus on growing food. If I tried to do absolutely everything that makes life better

The last part of this is a reductio ad absurdam. The first part rather neglects that large companies do, in fact, often do many different things (and not all of them designed to maximise profits in the short term).

15

Robert the Red 07.24.08 at 11:06 am

Prior to the 13th Amendment, it would have been the proper thing for corporations to hold slaves, if that would increase their profits? And to lobby against the abolition of slavery? Is is proper now for corporations to lie when they lobby against regulation of toxic chemicals in the workplace and in their products? It is certainly not against the law to lie to the public, so if that improves their profits, even at the direct cost of human health and life, it must be socially optimal.

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Tracy W 07.24.08 at 11:07 am

Shashank: I recognize that the proviso of ‘good property rights’ is meant to address this, but is it fair to begin with a presumption of perfectly internalised costs?

Hmm, I need to be clearer. I don’t think we can ever perfectly internalise costs. But the economy can survive in a state of less than perfect efficiency – it has for all of human history.

The focus should be on, if there is a large non-internalised cost, internalising it by changing the property rights system or the tax system. For this reason I support addressing greenhouse gas emissions by either a global cap-and-trade system or a comprehensive tax on those emissions.
If there are multiple large non-internalised costs, then the decision of which to do first should be based on a combination of how large the problem is and how easy it is to do the change.

These are difficult problems. But at least internalising costs provides a price signal for orgnaisations and individuals to figure out what is the most efficient way of reducing GHG emissions. As far as I can tell, creative capitalism provides no such guide.

So I propose this because I think it is more useful to look at improving property rights than it is for firms to take on multiple goals.

And if there are significant market imperfections, why not attempt to legislatively intervene in order to usefully direct the rent that would otherwise accrue to one category of people?

I am inclined to think that on the whole this would be a better option than creative capitalism. Government of course has its problems, even democratic governments, but these I think are inherent in the structure of government. I don’t think that businesses are any better placed to make non-market decisions than a democratic government on the whole. (Okay, occasionally democracies get governments which are so dysfunctional that a magic-eight ball would make better decisions, but then any organisation can have the same problem).

This is a general statement. I reserve the right to think that any particular democratic government decision is wrong.

17

Tracy W 07.24.08 at 11:16 am

The last part of this is a reductio ad absurdam.

This is exactly my point. Believing that we can deal with all the complexities of life, and don’t need to draw boundaries, is an absurd position.

The first part rather neglects that large companies do, in fact, often do many different things (and not all of them designed to maximise profits in the short term).

So you think that growing food is just one single thing and it maximises profits in the short-term? Surely if I am to grow food I do multiple things. I have to decide which crops to plant. I have to obtain seeds. I have to plant the seeds. The crops need sufficient water, and perhaps fertilisers and/or weeding. The crops then need to be harvested – and the right time to harvest is a decision in itself. They then need to be sent to market or off further processing. Also, growing food is not a way to short-term profits. It takes time for food to grow. You spend money upfront and only get it back when you sell the food.

I’m sorry for using an example that confused you. I thought that everyone knew that growing food is not a single task. My apologies, I should not have made that assumption.

18

James Wimberley 07.24.08 at 11:23 am

To inject some actual data into the thread, a better example of compartmentalisation would be the decision by the Wellcome Trust in 1995 to sell off its huge pharmaceutical business to Glaxo, a classic profit-maximising, rent-seeking Big Pharma corporation. The customers gouged by GlaxoSmithKline are paying for half of Britain’s entire medical research.
No, I don’t know what to think of this, but it must be better documented than Bill Gates’ private decisions.

19

derek 07.24.08 at 11:28 am

First, a nitpick. The duty is not to maximise profit, it’s to maximise return on investment. Not quite the same thing, as you could achieve the former without achieving the latter via a massive share issue increasing investment. We know what you mean though.

More seriously, Tracy W is wrong that a company that produces goods and services for less than the labour and capital would cost is maximising social utility. It’s actually failing to maximise ROI. A more highly-performing direector would raise the price of the product he sells you until it barely comes in under the total cost of you just doing it yourself.

Then he would act to make it harder for you to do it yourself, via procuring restrictive laws and/or buying up or eliminating your means. Then he would jack up the price until it’s just below the new cost of doing it yourself, and repeat. This is not socially useful; it’s fucked up behaviour. But it happens.

20

ejh 07.24.08 at 11:30 am

I’m sorry for using an example that confused you. I thought that everyone knew that growing food is not a single task. My apologies, I should not have made that assumption.

No, instead of making assumptions, you should have thought about what you are writing. Had you “thought”, you could perhaps have thought of some companies who perform multiple tasks, not all of which can be put under one title in the way that “growing food” can be. You could perhaps also have “thought” that taking on other responsibilities does not prevent one’s core business from remaining one’s core business, and you could perhaps have thought of some activities that companies currently engage in which neither constitute maximising profits nor cause them to struggle with focussing on their core business.

This would involve comparing your assumptions with what already happens right now in the world: I would commend this approach to you.

21

Tracy W 07.24.08 at 11:37 am

Prior to the 13th Amendment, it would have been the proper thing for corporations to hold slaves, if that would increase their profits? And to lobby against the abolition of slavery?

Indeed. But of course individuals are perfectly welcome to refuse to invest in or work for or buy products from companies that hold slaves or lobby against the abolition of slavery. This rather diminishes the profitability of any such behaviour in a society that generally disapproves of slavery. In a society that generally approves of slavery, where no such economic pressures exist, eg Ancient Rome if it had corporations, there will be plenty of companies run by people who are absolutely fine with owning slaves.

Is is proper now for corporations to lie when they lobby against regulation of toxic chemicals in the workplace and in their products? It is certainly not against the law to lie to the public, so if that improves their profits, even at the direct cost of human health and life, it must be socially optimal.

Firstly, the my defense was under a system of good property rights. If a firm can maximise their profits at the direct cost of human health and life, the right solution is to change the law. I think there is ample evidence that if it is possible to profit at the direct cost of human health and life, then regardless of the economic system there will be people who are willing to do so. There are plenty of politicians who have lied for political profits at the direct cost of human health and life. We have to set in place laws that stop this happening, not just rely on the inherent goodness of people’s hearts, as there’s no reason to believe such goodness exists in every heart. Once we have set in place these rules, why place other obligations on companies?

On the more general question of whether lying is profitable in the long-term, I am inclined to think that it isn’t (depending on the situation of course, if for example you can save someone’s life by lying to a deranged would-be murderer I say go for it). Generally it harms your reputation and that does long-term damage to profitability. I prefer not to deal with companies I can’t trust, and neither do many other people.
Anyway, if a company or an individual lies the best solution is to do our best to reduce the incentives to lie, not to extort them to take on various other goals.

If a firm thinks it is profit-maximising in the long-term to maintain a reputation for truthfulness, or to refrain from owning slaves, this strikes me as on the same level as a firm thinking it is profit-maximising to buy a back-up generator so it can still supply its customers in the event of a blackout. My objection is to the argument that a firm should take on multiple goals other than profit-maximising ones.

22

Tracy W 07.24.08 at 11:46 am

EJH – I take it from your replay that you are now convinced that growing food is not just one single activity. Is this right?

As for your other points:

Had you “thought”, you could perhaps have thought of some companies who perform multiple tasks, not all of which can be put under one title in the way that “growing food” can be.

I am afraid you misunderstand my argument again. I was arguing that lines need to be drawn somewhere in order to diminish the complexity of life. I was not arguing for any particular line, indeed I originally stated that the boundaries are somehat arbitrary.

You could perhaps also have “thought” that taking on other responsibilities does not prevent one’s core business from remaining one’s core business

Again, this is something I am not arguing. I am arguing that at some point, taking on more and more responsibilities does prevent you from doing your core business. Do you agree with this statement, or do you think that you can take on other responsibilities without affecting your performance on any of those responsibilities indefinitely?

and you could perhaps have thought of some activities that companies currently engage in which neither constitute maximising profits nor cause them to struggle with focussing on their core business.

Can you provide some examples of activities that companies currently engage in which neither constitute maximising profits nor cause them to struggle with focussing on their core business, and are done better by those companies than an organisation that focuses on that activity exclusively?

23

Tracy W 07.24.08 at 12:00 pm

More seriously, Tracy W is wrong that a company that produces goods and services for less than the labour and capital would cost is maximising social utility.

I never said any such thing. How can any company produce goods and services for less than its costs? This is just nonsense. What I said is that a firm that produces goods and/or services for more than the costs of its inputs in a system of good property rights is increasing social utility.

I make enough stupid mistakes of my own. Please don’t make up stupid statements and then accuse me of saying them.

A more highly-performing direector would raise the price of the product he sells you until it barely comes in under the total cost of you just doing it yourself.

Thus creating an incentive for a competitor to come in and supply the good for cheaper.

Then he would act to make it harder for you to do it yourself, via procuring restrictive laws and/or buying up or eliminating your means.

If a firm goes around buying up other people’s means, then it is going to get more and more people providing means for it to buy up. The market can’t distinguish between a rise in the demand for goods caused by someone who is really going to use them, and a demand for goods for other reasons. If people are buying x, then x will be supplied. During the dot-com bubble, when people were buying anything that looked like an Internet company, profitable or not, there were a hell of lot of internet companies created. Eventually therefore the director uses up all the company’s money buying means of production that people have been happily selling to him and the company goes broke. If the means of production are inherently limited, then people have an incentive to come up with alternatives.

Procuring restrictive laws creates an incentive for me and everyone else who is affected by those laws to lobby against them. Eliminating my property creates an incentive for me to call in the police to get rid of those thugs, and if that doesn’t work, to defend myself, or to move away and invest in something that can’t be eliminated (this may explain why the Chinese and Jewish people are so fixed on education, it’s something that can’t be stolen).

This is not socially useful; it’s fucked up behaviour. But it happens.

And yet somehow we are amazingly rich. The trouble with trying to destroy people is that they eventually figure out how to defend themselves. The Vikings ran into that problem. The absolute monarchies ran into that problem. Slowly humanity is getting better at reducing parasticial behaviour like that which you describe. Democracy is spreading, economic freedom is spreading. The world isn’t perfect, but it’s wonderfully better than it could be.

I don’t see how giving firms multiple objectives will improve that process.

24

jhe 07.24.08 at 12:08 pm

in many countries, such as Germany, companies are obliged to take worker interests into account

Without being in any way obliged to, companies do this in the US, too. It’s just that some workers interests get taken more seriously than others.

Seriously, US capitalism is a train wreck from the standpoint of the agency problem. There is little or no social consensus on what are good goals to pursue outside of return on equity. Adding goals to the corporate mission seems likely to dangerously overburden the limited capacities of managers. I’m not at all sanguine about the notion that a company which I nominally own through stock ownership will pursue goals that I would remotely support.

If political actors generally regarded the activities of a firm as socially desirable, they will presumably be less likely to take action that might damage it.

Speaking of agency problems…. Do you mean looking the other way when tobacco companies put stuff like benzene in cigarettes because they support the arts or buy from black farmers? Or do you mean subsidies and loan guarantees for companies that support the ‘right’ causes? Or do you mean blocking take overs of companies by companies run by less socially conscious management teams?

As an American liberal / social democrat, I think that corporate management would work better with less rather than more capitalism.

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Tracy W 07.24.08 at 12:10 pm

Drat, here’s an example of me making stupid mistakes all by myself:
What I said is that a firm that produces goods and/or services for more than the costs of its inputs in a system of good property rights is increasing social utility.

What I meant to say was that a firm that produces goods and/or services that sell for more than the costs of its inputs in a system of good property rights is increasing social utility.

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ejh 07.24.08 at 12:21 pm

I take it from your replay that you are now convinced that growing food is not just one single activity. Is this right?

I thank you for reminding of something I’ve known for about forty years. Can I prtopose you take your own advice? “Please don’t make up stupid statements and then accuse me of saying them.”

(Incidentally, I live in a rural area, with various kinds of farming all about me.)

Do you agree with this statement, or do you think that you can take on other responsibilities without affecting your performance on any of those responsibilities indefinitely?

Ah, “indefinitely”. I’m afraid that’s another reductio ad absurdam. It’s not a good way to argue.

Can you provide some examples of activities that companies currently engage in which neither constitute maximising profits nor cause them to struggle with focussing on their core business, and are done better by those companies than an organisation that focuses on that activity exclusively?

Well, you have smuggled in the last of those criteria to prop up a struggling argument, but to be honest it’s neither probable nor necessarily of relevance. The question is, whether the company that understakes these activities thinks it is of benefit to them. If, say, my local bank undertakes an extensive programme of sponsoring and organising cultural and sporting events – which costs it a great deal of money – does it do so better or worse than anybody else that might organise such a programme? I can’t say. Does it consider it money well spent? Evidently, because it has done so for many years and continues to do so.

Now I imagine that – perhaps in the name of, heh, economic freedom – a shareholder might challenge that policy, on the grounds that it prevented the bank from maximalising the return on their investment. The bank could only respond that it thought this sort of social investment was both worthy in itself, and perhaps that it thought (quite unprobably of course) it would assist the public image of the bank and make it more money in the long run. Still, armed with our certainty in a given sort of economic dogma, we may choose to know better, for surely if they did that sort of thing indefinitely, they would lose focus on their core activity of providing banking services. And because doing something indefinitely is bad, doing so seriously must, also, be a bad thing.

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Tracy W 07.24.08 at 12:51 pm

Ejh: I thank you for reminding of something I’ve known for about forty years. Can I prtopose you take your own advice? “Please don’t make up stupid statements and then accuse me of saying them.”

So since you already knew that growing food involves different things, what did you mean when you said, in reply to my earlier argument, that: “The first part rather neglects that large companies do, in fact, often do many different things (and not all of them designed to maximise profits in the short term).”?

Ah, “indefinitely”. I’m afraid that’s another reductio ad absurdam. It’s not a good way to argue.

So I now conclude that you agree with my statement that “At some point trying to cover more and more means an overall loss of effectiveness.” That’s nice to have that cleared up.

Well, you have smuggled in the last of those criteria to prop up a struggling argument

No, I did not smuggle it in. It was there in my argument for the start. To quote my first comment: “Doing one thing well is hard. Adding more just gets harder and harder. There’s some point where it’s best to not add any more things, and instead focus on narrow goals.”

The question is, whether the company that understakes these activities thinks it is of benefit to them.

The relevant question is what reason there is to believe that this will increase society’s utility (or whatever you want to call the benefits of banking and of sponsored cultural and sporting events) more than having two separate organisations undertaking the different sets of activities.

I don’t care what your bank may or may not think about this. I care about what evidence there is to support the idea. It is entirely possible that your bank management are doing this out of social concerns but overall are doing worse than if the two jobs were done by different organisations.

And because doing something indefinitely is bad, doing so seriously must, also, be a bad thing.

Anyone adopting this logic would be in a quandry indeed. After all, if you never drink water you die of thirst, while if you drink too much water you die of an electrolyte imbalance. The relevant question is what is the right amount of water to drink. In the case to hand, does it make sense for one organisation to try to both maximise profits (which involves different tasks in and of itself) and pursue some other social goal, or does it make sense to have two or more separate organisations with narrower tasks?

Your arguments here imply that you agree that drawing boundaries, even somewhat arbitrary ones, is necessary at some point to actually get things done – is this right?

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Slocum 07.24.08 at 1:31 pm

If political actors generally regarded the activities of a firm as socially desirable, they will presumably be less likely to take action that might damage it.

But isn’t that a nice short summary of the problems of Fanny Mae & Freddy Mac–political untouchability bought by a claim to promoting socially desirable goals? The problem with encouraging corporations to become quasi-welfare agencies is that they’ll then be more able to get away with murder. Making corporations focus on the bottom line has the desirable outcome of making it more difficult for them to buy social and political immunity.

Better, I think, to have clearly delineated roles. The role of corporations is to earn a profit within the bounds of the rules. And the role of societies and governments is to devise (and enforce) rules such that corporate activities do not result in socially harmful outcomes. And then when a corporation’s management is caught breaking the rules, the authorities are free to come down appropriately hard, rather than look the other way because of all the socially beneficial work the corporation also does in helping grannies cross the street.

It’s not just that we shouldn’t require corporations do charity work, I’d say we shouldn’t allow it. But not because of fiduciary responsibility to shareholders.

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John Emerson 07.24.08 at 1:43 pm

I love it when libertarians get righteous. They seem coldblooded and amoral, and they love to taunt soft-hearted people with snarky provocations, but they’re passionate about fiduciary obligations.

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J Thomas 07.24.08 at 2:02 pm

I have an analogy from bacterial ecology.

Put E coli into a culture medium that has no vitamins. Each individual cell will gear up to produce the vitamins it needs. The fixed cost of producing vitamins — the enzymes needed to make them — is high. The variable cost of producing enough vitamin to live on is low, but next generation they’ll need more, twice as much each generation. So they produce much more vitamin than they need, and they excrete the excess. Eventually there is more vitamin in the culture medium than they need, and they stop making it and grow faster.

In continuous culture, new culture medium is piped in while old medium plus cells is piped out. They grow until the population is using up resources at the same rate they get removed. If the population was larger they’d use up resources too fast and have to slow their growth, the excess individuals would be piped out until the population size went down to something that used the stuff slower. If the population was smaller they wouldn’t use stuff up as fast, the concentration of the limitiing resource would be higher and they could grow faster. They get a stable population size, growing as fast as they can under the circumstances. And in that situation some cells produce vitamins while most don’t. The ones that do produce extra vitamins and pump it into the medium where others can use it. For free — it would be very hard for bacteria to charge for their products. The ones that make vitamins and grow somewhat slower (largely because of the cost of making the enzymes that make the vitamins) appear to be chosen at random. Some notice there aren’t enough vitamins and start making more, others get enough and don’t make more.

A mutant that didn’t ever produce vitamins but just depended on others ought to increase in the population, but the more it increases the lower the vitamin concentration goes down, and then the population size goes down…. But in practice this is not the most important innovation that can happen. Some other mutation happens that improves survival in that environment, and the other kind of mutant takes over — pushing out everything that doesn’t survive as well including the ones that get the minor advantage of never being tagged to produce vitamins.

So some cells make a degree of sacrifice for the others. The result is that the environment becomes something that E coli survives better in, and the better they survive as a population the less chance something else moves in and outcompetes them all. The sacrifice is done by individuals chosen at random. If one cell in a thousand dies for the rest, that isn’t a whole lot of natural selection against the trait, and the ones that produce vitamins don’t even die for it.

So in this particular case bacteria do a minor degree of altruism. Even though the immediate natural selection is for individual mutants to outcompete their fellow E coli, still evolution has provided a method to create a better environment for them to compete in.

In our philosophical arguments, we should consider that even if corporations “ought to” try to maximise profits, still they are human institutions and it’s rare for human instititions to be better than 90% effective at their purposes. If its profits are 10%, its waste is likely to be around 10% too. A corporation that devotes a few percent of its profits in attempts to aid the bigger society, won’t find that an onerous burden. And in the process it might find improved ways to make money.

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J Thomas 07.24.08 at 2:15 pm

If, say, my local bank undertakes an extensive programme of sponsoring and organising cultural and sporting events – which costs it a great deal of money – does it do so better or worse than anybody else that might organise such a programme? I can’t say. Does it consider it money well spent? Evidently, because it has done so for many years and continues to do so.

Now I imagine that – perhaps in the name of, heh, economic freedom – a shareholder might challenge that policy, on the grounds that it prevented the bank from maximalising the return on their investment.

Should the shareholder go to court to prevent his company from doing something he thinks hurts his interests? What if the bank then counts up the costs and determines that this social good costs him about 3 cents a year? Perhaps he can make it a class action suit to benefit all the shareholders?

Maybe the better approach is to start a proxy war. Spread the stories about this very public waste that management has approved. See how many votes you can get to throw the bums out and put in a new bank president — you, perhaps.

Then if it works, you can be the one who sits in the office with the rich persian rugs and the original Rembrandts on the wall, the office in the half-billion-dollar building; you can eat the Godiva chocolates and drink the special $15/cup coffee that your secretary brews for you paid out of the petty cash, and as you drive home in your $90,000 company car you can reflect on the great job you did when you stopped the company from wasting its money on social projects.

Wouldn’t it be nice if we could make every form of corporate waste illegal? So every time they throw away a carpet that isn’t completely worn out yet, they could be arrested or fined?

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albert 07.24.08 at 2:22 pm

The problem with encouraging corporations to become quasi-welfare agencies is that they’ll then be more able to get away with murder.

Indeed, because there aren’t plenty of corporations who aren’t quasi-welfare agencies that get away with murder in their own spectacular way.

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Donald A. Coffin 07.24.08 at 2:48 pm

I’m amused that no one in this thread recognized that Posner is channeling Milton Friedman’s 40-year-old essay in the NYTimes, “The Social Resooinsibility of Management is to Maximize Profits.” (Or something close to that.)

One of Friedman’s arguments is, in fact, the agency argument. The firm maximizes profits, remits those profits to its owners (he was not a fan of retaining earnings), and, if the owners wish to be socially responsible (whatever they might decide that means), then they can use their share of the profits for those purposes. He objected (and, as I read Posner, Posner objects) to the “corporation”–not a living entity–substituting the judgment of management for the judgment of owners.

I think there are lots of things about this argument that are specious, but it’s been around a long time…and Friedmand was not the first to make it.

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Slocum 07.24.08 at 3:20 pm

Indeed, because there aren’t plenty of corporations who aren’t quasi-welfare agencies that get away with murder in their own spectacular way.

But the point is, would this tend to make the problem of enforcing the rules harder or easier? It seems to me that this provides another avenue for corporations to buy influence and immunity (who would be surprised, for example, that corporation’s charitable activities were directed toward non-profits managed by family members or key supporters of powerful politicians)?

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robertdfeinman 07.24.08 at 3:40 pm

Corporate laws in Europe (especially Scandinavia and Germany) have additional requirements that the firms must meet. These include labor laws and environmental laws and seats on the board for the unions.

These firms have no trouble competing with the US firms without similar restrictions. Corporations are the creation of congress, what they do and how they do it are legal fictions, they have no inherent basis.

It is shortsighted libertarian blather to think that there is some universal law of the universe that requires firms to only try to maximize profit. Even in the US firms have lots of flexibility as to what sort of steps they take (new corporate headquarters, new ad campaign, more R&D, bonuses for the CEO). These all get justified as maximizing profit – eventually.

Those who sing the “profit” song are just amoral. In Europe they have a concept called solidarity – everyone is part of society. In the US we have the John Wayne mentality. It has failed and left a large residue of mean spirited and selfish people behind.

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Chisel 07.24.08 at 3:42 pm

Frankly, I do not see how amending corporate law to allow for corporation’s to pursue objectives other than maximizing shareholder value would really change much. Directors and officers are protected by the business judgment rule, which means that courts will almost always defer to the decisions of the board (except in instances of self-dealing). The practical effect is that anything less than criminal behavior will not be scrutinized. Thus, when the owner of Wrigley Stadium refused to allow the Cubs to play night baseball on the grounds that it was bad for the neighborhood and would encourage all sorts of vice, his decision was respected by the courts in the face of evidence that night baseball would make the stadium/team more profitable.

What is more, there is a string of court decisions that essentially uphold corporate philanthropy on the grounds that corporations have an interest (albeit attenuated) in providing money to charities, social groups, colleges, schools, etc.

The problem as I see it is not that corporations are being prevented from engaging in charitable works/socially-beneficial behavior because of this fiduciary duty to shareholders; rather, the problem is that corporations who are leaving profits on the table, so to speak, are at risk of either a shareholder revolt or a hostile takeover. If shareholders think the company is wasting money, there is likely to be those who will either try to replace the board or otherwise gain control. Similarly, private equity shops and other companies will see a corporation that is engaging in a lot of philanthropic work at the expense of profits as a lucrative takeover target.

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Tracy W 07.24.08 at 3:58 pm

J Thomas: If its profits are 10%, its waste is likely to be around 10% too. A corporation that devotes a few percent of its profits in attempts to aid the bigger society, won’t find that an onerous burden.

A corporation that is making a profit in a society with good property rights is aiding the bigger society because it is providing goods or services worth more to bigger society than the inputs.

Once we get away from profit-maximising behaviour, aiding bigger society becomes a lot more difficult. How can you know that you are improving things, taking into account all the resources you use in your charitable activites? I direct my charitable donations to things like 10-cent medicines for the poor, on the basis that the value of a human life is far above the cost of the medicine, or the cost of food parcels after an earthquake.

And, even once we are comfortable that some non-profitable activity does increase social utility even once all the costs are taken into account, doing good (as opposed to intending to do good) is *hard*. For example, Florence Nightengale worked out that her hospital in the Crimean had actually had a higher death rate than others – there was a dead horse in the water supply and she insisted on giving the patients lemonade, not beer. Call me an idealist, but I think we should be aiming at improving society, not at merely donating money and time without regard to whether it is effective.

Should the shareholder go to court to prevent his company from doing something he thinks hurts his interests?

Nope. Just sell his shares. I can’t see that courts have any particular expertise at second-guessing business decisions about what is profit-maximising. Of course if there is a specific contractual breach (eg the CEO’s contract said the CEO would stop any corporate donations and they didn’t) then the shareholder has a case.

The main advantage I see to legally distinguishing between profit-maximising firms and others is if there is a case for different tax treatment of the two entities. Just because I think it is wise for organisations to focus on their knitting, be that making a profit by growing food or rescuing people after natural diasters for no profit at all, doesn’t mean I think the legal system should try to enforce it.

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Tracy W 07.24.08 at 4:27 pm

Those who sing the “profit” song are just amoral.

It’s not amoral to maximise profits. Maximising profits in an economy with a system of good property rights is the fastest, easiest way to improve the lot of your fellow humans. When you maximise profits in an economy with good property rights, you are selling goods or services that are worth more to your fellow humans than the sum of the inputs used to create those services. This is a highly moral thing to do.

It is shortsighted libertarian blather to think that there is some universal law of the universe that requires firms to only try to maximize profit.

Can you please provide a citation of a libertarian who has argued this? Because I have never heard any libertarian making such an argument.
Just because I think something is good doesn’t mean I think it is a universal law of the universe. Ice-cream is good, but it is all too easy to imagine a state of affairs on our own planet where there is no ice cream.

In Europe they have a concept called solidarity – everyone is part of society. In the US we have the John Wayne mentality. It has failed and left a large residue of mean spirited and selfish people behind.

Can you please provide some data on the relative percentages of mean spirted and selfish people in the USA compared to other countries around the world? Because I have my doubts about the truthfulness of your statement above. For example, the United States in the world happiness index rates at 23 in terms of country ratings, or 246.67 in terms of raw numbers for satisfication with life index (SWLS), compared to Denmark at number 1 or 273.33. European countries that are less happy than the USA include Belgium, Germany, the UK, those miserable Spaniards, the famously gloomy Italians, the woeful French (at 63 in world ranks, and 220 in terms of SWLS), and the sucidially-depressive Greeks (at 84th in terms of world rankings and 210 in numbers). If America was full of mean spirited and selfish people compared to Europe, I would expect them to be a lot less satisfied with life.
Reference http://www.le.ac.uk/users/aw57/world/sample.html

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J Thomas 07.24.08 at 4:53 pm

A corporation that is making a profit in a society with good property rights is aiding the bigger society because it is providing goods or services worth more to bigger society than the inputs.

Maybe.

Maybe it found a bottleneck that nobody found a way to widen, and it found a way to narrow the bottleneck and skim off money that passes through.

And maybe the service it provides to society is to prevent some more grasping corporation from exploiting that bottleneck worse.

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J Thomas 07.24.08 at 5:01 pm

Once we get away from profit-maximising behaviour, aiding bigger society becomes a lot more difficult. How can you know that you are improving things, taking into account all the resources you use in your charitable activites?

How can you know that you are improving things when you make a profit?

I figure that when you try out new stuff, you find out things you didn’t know before. If you focus too tightly on maximising profits then you narrow your vision. Various things you might find useful don’t get learned. Better to try out some other approaches, including spending some time not trying to maximise profits. What you learn from it might in fact help you increase profits. And if it doesn’t, chalk it up to experience.

But rather than just doing things at random, it might be better to spend some time trying to improve your environment generally. Maybe do things that are good for your company but that don’t specifically improve your company’s competitive ability. Sure, spend *some* time doing random things but also spend some time going after other goals, because the things you need to know (that you haven’t even heard about yet) aren’t completely random. And when you try to do good you’re more likely to do good than when you try to do random, or try to get ahead. It isn’t a sure thing, but it does improve the odds somewhat.

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robertdfeinman 07.24.08 at 5:13 pm

Tracy W:
Here’s a study to counter yours on “happiness”.
PDF

Also I don’t know what happiness has to do with selfishness. It seems to me that some of the most selfish people are the happiest, they get everything the way they want it without concern for others.

As for the libertarian argument about maximizing profits, that’s how this thread started and Posner has already been cited. I consider him a well-known libertarian, perhaps he doesn’t belong to your particular subgroup. It’s so hard to tell with all the fine distinctions between the sects.

As for the degree of selfishness, I’m not sure about any studies quantifying this, but if we go by actions we can see the difference. First of all Europe has this concept of “solidarity”, which means that enough people support it for it to be a commonly understood social norm.

Second, there are no libertarians in Europe (with a small exception in the UK). They don’t get their life support from the super wealthy cabal that funds Cato, Heritage, Hoover and the rest of the think tanks, so their anti-social ideas sink like a stone. Libertarianism in the US is kept on life support by constant infusions of money.

I won’t go into the funding issue, but for those interested just consult Media Transparency and look up the institutions and the wealthy families (Koch, Olin, Scaife, Walton, Mars, Coors, etc.). The fact that Posner is at Chicago indicates that he is also part of this effort.

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sg 07.24.08 at 5:15 pm

It’s not amoral to maximise profits. Maximising profits in an economy with a system of good property rights is the fastest, easiest way to improve the lot of your fellow humans. When you maximise profits in an economy with good property rights, you are selling goods or services that are worth more to your fellow humans than the sum of the inputs used to create those services. This is a highly moral thing to do.

I note that lots of companies which do business in Saudi Arabia maintain separate service areas for men and women, and the men’s areas are always luxurious while the women’s are shabby. They do this so they can maximise profits. I presume, Tracy W, that you think that this is the “fastest, easiest” way for them to improve the lot of their fellow humans?

I presume also that you think a land mine company lobbying against treaties banning landmines is finding the “fastest, easiest” way to improve the lot of all those Cambodian kiddies who get blown up?

And private insurance companies which deny insurance to people with pre-existing conditions, pay large numbers of staff to prevent policy-holders being reimbursed for medical expenses, and lobby against nationalised insurance systems which are known to halve the overall cost of healthcare – these are all promoting human welfare in the “fastest, easiest” way?

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sg 07.24.08 at 5:19 pm

Or supermarkets who don’t open as many branches in poor areas, and only sell high-profit junk food in those branches – maximizing the good.

I wonder Tracy W how you would like it if you lived in a society where family doctors only ever considered the welfare of their bottom line, rather than the broader social and public health implications of their work, when they opened and managed their services? The same consideration applies to companies which run chains of doctors surgeries, which often put a great deal of effort into quality care. Gym companies also tend to focus on a much broader set of outcomes than just profits, and it’s unlikely that their gyms would be as good if they didn’t do this. We generally, i think, expect child-care chains to consider social good rather than just profits. But perhaps you think a child care company valuing the well-being (rather than just the physical safety) of its charges is a case of it doing “too many things” at once?

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mikez 07.24.08 at 5:23 pm

“Can you please provide some data on the relative percentages of mean spirted and selfish people in the USA compared to other countries around the world?”

Sure, I’ll provide some data that’s just as relevant as the data you provided: The average Earth-Moon distance is 384401 kilometers.

It’s very strange to assume that selfish people are less satisfied, especially in a system where selfishness is rewarded and looked on as a virtue. It’s very strange to assume that corporatist ideology has more (anything?) to do with claimed levels of satisfaction than, say, the ubiquitous cultural imperative to be appear optimistic even when one is truly not.

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geo 07.24.08 at 5:27 pm

And yet somehow we are amazingly rich. The trouble with trying to destroy people is that they eventually figure out how to defend themselves. The Vikings ran into that problem. The absolute monarchies ran into that problem. Slowly humanity is getting better at reducing parasticial behaviour like that which you describe. Democracy is spreading, economic freedom is spreading. The world isn’t perfect, but it’s wonderfully better than it could be.

This isn’t quite up to the rest of your arguments, Tracy. “People” is misleading. Usually many, many people are destroyed before some other people figure out how to avoid that fate. “Slowly” is also misleading. It ought to be “Far more slowly than necessary.” “Wonderfully better than it could be” is, I think you’ll agree on reflection, a meaningless phrase without further specification. I think a better phrase in current circumstances would be “nowhere near as good as it might be if clever people like me would devote some of the ingenuity I’m spending here defending the social utility of maximizing profits to helping figure out how to write laws and regulations that would minimize the corporate and financial greed and guile that cause so much waste and needless suffering.”

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Slocum 07.24.08 at 5:45 pm

Can you please provide some data on the relative percentages of mean spirted and selfish people in the USA compared to other countries around the world?

How about this:

Q. Are Americans more or less charitable than citizens of other countries?
A. No developed country approaches American giving. For example, in 1995 (the most recent year for which data are available), Americans gave, per capita, three and a half times as much to causes and charities as the French, seven times as much as the Germans, and 14 times as much as the Italians. Similarly, in 1998, Americans were 15 percent more likely to volunteer their time than the Dutch, 21 percent more likely than the Swiss, and 32 percent more likely than the Germans. These differences are not attributable to demographic characteristics such as education, income, age, sex, or marital status. On the contrary, if we look at two people who are identical in all these ways except that one is European and the other American, the probability is still far lower that the European will volunteer than the American.

It seems to be the case that Europeans more than Americans tend to assume that charity is the role of governments and corporations rather than individuals.

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Slocum 07.24.08 at 5:49 pm

Source for the last post:

http://www.american.com/archive/2008/march-april-magazine-contents/a-nation-of-givers

There’s this as well:

http://www.philanthropyuk.org/Resources/USphilanthropy

Would we not run a risk, in adopting a more European model, of having corporate philanthropy crowd out private giving and volunteerism?

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geo 07.24.08 at 7:01 pm

It seems to be the case that Europeans more than Americans tend to assume that charity is the role of governments and corporations rather than individuals.

That’s one way to put it. Another would be: Europeans believe that everyone is entitled to adequate social services as a matter of right, without having to hope for private charity, and are willing to pay taxes for it because they have a government they trust to administer these services efficiently.

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Freshly Squeezed Cynic 07.24.08 at 7:07 pm

Ah, but geo, then we would not have a moral stick to beat the perfidious Europeans with, and where would we be then?

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Cliffy 07.24.08 at 7:16 pm

Skimming the thread, it seems like Tracy’s got the bases covered on this one. The parade of horribles (like owning slaves, etc.) is irrelevant for the reasons she suggests — if something is immoral, then let’s make it illegal. As long as it is legal, then an economic actor who refuses to engage in it out of a moral sense isn’t getting the best bang for its buck. The opening post’s best argument is in this arena — it might be that behaving in a “moral” fashion is in a company’s long-term best economic interest. If so, **convince them** — something we can do with our own economic power as consumers. I.e., if you’re into big boxes, shop at Target rather than Wal*Mart because the former pays its employees better, donates to charity (a lot), takes greater steps to alleviate its environmental impact (although W*M is getting better on this) and doesn’t go into small towns with the business plan of driving all the small stores out of business and then jacking up prices.

The thing that I don’t like about the whole “make corporations better actors” thing is that that’s not the solution. Corporations are tools (or, if you’d prefer, weapons) for generating wealth. Let them do their thing, but legislate the paths they can go down. Private corporations cannot do the work of regulatory agencies because that’s not their goal. Which is why we need more and better regulatory agencies.

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Bruce Baugh 07.24.08 at 7:34 pm

Neither Freidman nor Posner actually mean what they’re saying, though. At least I’d put a really hefty wager on the idea that Posner is not in favor of being repeatedly kidnapped and held for ransom by proprietors of unsuccessful businesses, even though kidnapping is lucrative and low in operating costs. Nor, I would guess, would he regard a greatly increased risk of kidnapping for his friends and families as simply the sensible exercise of business prioritization in places where kidnapping’s even easier. All this stuff always presumes a moral framework which usually goes unacknowledged, and what critics are doing is challenging the assumption of that particular moral framework.

Two hypotheticals:

#1. I am the proprietor of Post-Capitalist Services, offering books, courses, and consultation for firms interested in alternative priorities. I find Posner and Tracy W significant impediments to my business: potential customers repeatedly tell me that they’ve been swayed away by those two people’s arguments. It is clearly profit-maximizing for me to arrange for their assassinations, if I’ve got the money to pay for good-quality hits.

#2. I am a senior manager in a large firm that does a great deal of business with the Department of Defense and other government agencies. In an administration given to cost-cutting, my sales are off. We happen to make an extremely good profit margin on a variety of military-related items, not just weaponry and such but also security deals we sell to other private firms, and like that. As an investment, I sponsor the work of advocates for war in some part of the world that often has conflicts. I help their allies in the administration gather manipulatable intelligence, and also to just plain invent some. We do go to war, millions of people die and suffer on spurious grounds, but I make a pile of money even disregarding the sales to the government itself.

Are these legitimate efforts in profit maximization? If they are, then the advocates of the view are simply psychotic. If not, then there are moral bounds at work, and it is legitimate to analyze them explicitly rather than by assumption.

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Bruce Baugh 07.24.08 at 7:39 pm

A quick correction: Sloppy usage on my part. I used “maximizing” in several places where I should have said “increasing”. I do know that not all activity increasing a quantity maximizes it. Sorry for the sloppiness.

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MDHinton 07.24.08 at 7:52 pm

Reading from Slocum’s link:

‘The fact is that self-described “conservatives” in America are more likely to give—and give more money—than self-described “liberals.” In the year 2000, households headed by a conservative gave, on average, 30 percent more dollars to charity than households headed by a liberal. And this discrepancy in monetary donations is not simply an artifact of income differences. On the contrary, liberal families in these data earned an average of 6 percent more per year than conservative families.

These differences go beyond money. Take blood donations, for example. In 2002, conservative Americans were more likely to donate blood each year, and did so more often, than liberals. People who said they were “conservative” or “extremely conservative” made up less than one-fifth of the population, but donated more than a quarter of the blood. To put this in perspective, if political liberals and moderates gave blood like conservatives do, the blood supply in the United States would surge by nearly half.’

which might give some of you pause for thought…

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geo 07.24.08 at 8:23 pm

After pausing for thought, I went on Google and immediately found: http://angrybear.blogspot.com/2006/12/liberals-conservatives-charity-and.html.

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geo 07.24.08 at 8:29 pm

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Donald A. Coffin 07.24.08 at 8:47 pm

In economic theory, maximization is always subject to constraints. Among the constraints facing the profit-maximizing firm are legal prohibitions on certain actions. So it’s logically consistent to say “firms seek to maximize profits” (subject to constraints) and “managers don’t order hits on their competitors/critics” (because it’s illegal).

The tricky part is whether the constraints are those purely derived from economics (“to maximize profits, the firm generally needs to minimize costs”–where one of the constraints in the theory, although lots of people forget it, it “holding product characteristics constant”) and purely derviced from legal requirements and prohibitions, or whether moral prohibitions or imperatives can/must/should also figure in. The problem here, of course, is whose moral prohibitions or imperatives?

And note again that it’s fundamentally an agency issue, that it’s corporate managers making decisions on behalf of the owners of the corporations that creates the conflict.

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MDHinton 07.24.08 at 9:09 pm

Geo – I’m no expert on American charitable giving, but both those links you give are just left-of-centre guys looking at the stats and saying, ‘hmmm that can’t be right.’

From Slocom’s link again:
‘ These enormous differences are not a simple artifact of religious people giving to their churches. Religious people are more charitable with secular causes, too. For example, in 2000, religious people were 10 percentage points more likely than secularists to give money to explicitly nonreligious charities, and 21 points more likely to volunteer. The value of the average religious household’s gifts to nonreligious charities was 14 percent higher than that of the average secular household, even after correcting for income differences.’

Religious people were also far more likely than secularists to give in informal, nonreligious ways. For example

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MDHinton 07.24.08 at 9:19 pm

The relevance of this to the thread is as follows:

It is an article of faith amongst left-liberals, pushed hard in the left-leaning media, (the BBC and the Guardian in Britain) that conservatives are ‘nasty’ people. They are selfish and uncaring about society at large and so on. However the stats suggest this is not true. I think something similar happens with big business. Those who don’t like capitalism caricature corporations as mean and grasping, making enormous profits by grinding the poor into the dust. This is what makes people think that maybe they should be obliged to do some good in the world too. The reality is, of course, that they already engage in masses of charity work, sponsorship of sports and the arts, sending little girls abroad for operations (happened to my neighbour) and so on. Obviously they enjoy better public relations and some free advertising but the fact is that the shareholders are human and generally don’t object to the management behaving in this way, so everyone’s a winner. They could do more, they could do less: it’s up to the shareholders.

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sg 07.24.08 at 9:24 pm

cliffy, your theory works for things like slavery, but even then, in order for it to become illegal someone has to advocate as a leader in society for a moral step forward. The argument against fiduciary duty says that it should always be someone other than the corporations which does this – the unions, maybe, or a political movement, or a peak body for some charity. Why do corporate leaders get a free pass to get rich on immoral behaviour and not act to change it? Why should workers – who don’t have much money, and are relatively vulnerable – have to join together to fight the interests of the ruling powers in order to obtain a step forward which often is trivially easy to obtain if corporate leaders did it? The obvious example is the 8 hour day.

Also, there are some things which will never be illegal but are obviously immoral. According to Tracy W’s logic, Big Tobacco funding organisations to attack and discredit the science of cancer – and global warming – is completely okay, it “maximises” human progress, even though their efforts have measurably slowed efforts to prevent cancer and to slow global warming, which in the long term will lead to many many deaths. There’s no way what they did is illegal or could be made illegal, and the responsibility lay on individuals in an organisation not to do it.

Shilling and swift-boating are examples of things which will always be legal, and are always immoral and often destructive, but Tracy W thinks that they have “maximized” human welfare, even at the same time as she is advocating a response to global warming which hasn’t happened yet because of the shilling of these companies.

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sg 07.24.08 at 9:26 pm

MD Hinton, I would say that the slogan “there is no such thing as society” pretty much makes conservatives sound like they are uncaring about society. Defend that saying before you start bleating on about the poor misguided conservatives and how liberals hate them. You might also want to defend the death of a million people in Iraq, ultimately achieved through the decision and lies of a small conservative cabal. That is the very definition of callous.

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mpowell 07.24.08 at 9:34 pm

Bruce Baugh pretty much nails it. It’s not just about requiring that corporations obey the law. Examining his two examples, it’s clear that we should also not be enamored with corporation pursuing immoral means of maximizing profits. Those means can be quite destructive indeed. Problem is, companies can change the law to, by massively lobbying Congress. The economy with a system of good property rights that Tracy is so enamored with is a complete fiction.

But ultimately, Tracy doesn’t have a good argument for encouraging responsible corporate behavior. He just thinks life would be ‘less complicated ‘ that way. That’s actually not a terrible argument, but it’s not a principled position at all. Then it comes down to weighing things in balance in different circumstances. The more important part of this debate is, “how do we get corporations to do what we want?”. It’s not just about arguing what their goals should be. It’s about how we get them to pursue the goals we want. I’m not sure what role Posner views himself as playing, but he’s missing the point. The Europeans probably have the right idea on corporate management. You don’t want to interfere too much or your risk destroying this amazing profit-generating machine. But having rules and restrictions governing board membership are a good way to push companies to behave in more desirable ways and to check particularly nasty behavior before it really gets going. We could also recognize that the concept of corporate political speech is an abomination. But folks like Posner like to talk out of both sides of their mouth. If the idea that profit-maximizing companies are only a good thing in the right kind of legal environment, why would we want to allow them to monkey with that environment? It’s hilarious to me that this gets overlooked.

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MDHinton 07.24.08 at 9:36 pm

The ‘slogan’ you give is, famously, a slogan of the left used against conservatives, not a conservative slogan. Those who use it deliberately misunderstand what was being said.

Why are you people always so rude?

As far as the UK is concerned the war in Iraq was carried out by an anti-conservative uber-liberal, much to the annoyance of the conservative population which traditioanlly supports the armed forces and doesn’t like to see them killed pointlessly.

Even in America, whatever it was, it was not Mr. Bush’s conservatism that led him to kill ‘a million people.’

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Freshly Squeezed Cynic 07.24.08 at 9:53 pm

Geo – I’m no expert on American charitable giving, but both those links you give are just left-of-centre guys looking at the stats and saying, ‘hmmm that can’t be right.’

You seem to be no expert on judging someone’s political opinion, either. The guys at the Volokh Conspiracy are generally libertarian, not left-of-centre at all, and if you read that link you’d see the guy is approving a book attacking “redistributionism”. However, he also has a problem with the study’s methodology, despite it confirming his prejudices.

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Roy Belmont 07.24.08 at 9:58 pm

Cliffy 50-
“As long as it is legal, then an economic actor who refuses to engage in it out of a moral sense isn’t getting the best bang for its buck.

Bob Dylan-
“If somethin’s not right, it’s wrong.”

There are aliens among us.

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Patrick 07.24.08 at 10:03 pm

Personally, I think the phrase “good property rights” has implications. Two I can think of:

1. Corporations are things, not people. Therefore they don’t have rights. Specifically, they don’t have free speech rights. Those rights reside, individually and separately in the stockholders, i.e. the owners.

2. If you own something, you’re responsible for it. If you fail to maintain your car, and its mechanical failure causes tort, you’re liable for the damages. If you fail to maintain the businesses you own (say, Union Carbide) and the business damages someone (say, a person in Bhopal), you should be liable for the damages. And if there is criminal responsibility, we could define property rights so that the owners of the vehicle for the criminality bear responsibility–after all, they do get to keep the money.

You can jigger property rights to reduce the responsibilities of owners, and enhance their position vis a vis others–for example, consumers and employees. That’s one vision of “good property rights.” But your vision of the good is not a feature of reality, it’s something you’ve made up. And we could (and should) make up something different.

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sg 07.24.08 at 10:09 pm

speaking of deliberately misunderstanding things, MDHinton, who here (besides Tracy W) is caricaturing corporations as “mean and grasping, making enormous profits by grinding the poor into the dust”? We are assuming that corporations can and want to be more than this (the sports example has already been given) and discussing the sense of a law which protects them from claims of having been irresponsible by exercising the moral impulse they have.

And how come when Dubya kills a million people in an illegal war it’s not a measure of his conservatism, but when leftists assume bad things about conservatives, it is a measure of their leftism?

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seth edenbaum 07.24.08 at 10:12 pm

As always…
“Creative Capitalism” Lets run down a list of parallels:
Self interest= good will towards others.
curiosity=greed
art=commerce
advertising=art
interest=disinterest.
bias=objectivity
And on and on.
Why!? Why the need to try to create a unified field: to make bankers feel like humanitarians while doing their job? To make technocrats who live by oversimplification feel like they’re dealing in complexity and ambiguity? To make fans of Hello Kitty the equivalent of students of Masaccio?
Why not let conflict be conflict and let each of us work the rest out for ourselves? Trying to imagine a system rather than competing systems, you’re cheapening everything.
No, greed is not curiosity. But greed is desire sometimes is the mother of invention. Sometimes the best lack all conviction.
Life’s complex; don’t oversimplify it.

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Tracy W 07.24.08 at 11:23 pm

RobertDFeniman:Also I don’t know what happiness has to do with selfishness. It seems to me that some of the most selfish people are the happiest, they get everything the way they want it without concern for others.

So you expect me to believe that all these selfish people in America are not actually making Americans miserable. Then what’s the problem with selfishness?

As for the libertarian argument about maximizing profits, that’s how this thread started and Posner has already been cited.

I have read a number of Richard Posner’s arguments. I have never come across one where he says “there is some universal law of the unifverse that requires firms to only try to maximise profit”.

If he has, please provide the citation.

As for the degree of selfishness, I’m not sure about any studies quantifying this, but if we go by actions we can see the difference.

You forgot to mention the actions.

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Tracy W 07.24.08 at 11:31 pm

Bruce: Neither Freidman nor Posner actually mean what they’re saying, though. At least I’d put a really hefty wager on the idea that Posner is not in favor of being repeatedly kidnapped and held for ransom by proprietors of unsuccessful businesses, even though kidnapping is lucrative and low in operating costs.

Neither Richard Posner, Milton Friedman or myself approve of companies breaking the law.

Richard Posner, at http://www.becker-posner-blog.com/archives/2005/07/the_social_resp.html says
“My view is that, given external (i.e., social as distinct from private) benefits of compliance with law, the ethical argument should prevail, so that a shareholder would be precluded from complaining that corporate management, by failing to violate the law even when it could get away with it, was violating its fiduciary duty to shareholders.”

As for Milton Friedman, to quote from “The Social Responsibility of Business is to Increase its Profits”. http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html
“That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. “

The rest of your comment is based on the false belief that I, Richard Posner and Milton Friedman think it’s okay for firms to break the law.

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Tracy W 07.24.08 at 11:40 pm

In response to SG: cliffy, your theory works for things like slavery, but even then, in order for it to become illegal someone has to advocate as a leader in society for a moral step forward.. The argument against fiduciary duty says that it should always be someone other than the corporations which does this – the unions, maybe, or a political movement, or a peak body for some charity. Why do corporate leaders get a free pass to get rich on immoral behaviour and not act to change it?

Let’s separate out corporate leaders from corporations. To the extent that a citizen has a moral obligation to try to change the law, then corporate leaders have that responsibility as much as workers. What I am skeptical about is whether it is most effective for corporate leaders to advocate for the law change through their companies. I think it makes more sense for any corporate leader who wants a law change to set up a separate organisation to lobby for it. It allows people who support the law change, but don’t have any interest in the profit-maximising firm’s goods or services to support the law change, and vice-versa.

According to Tracy W’s logic, Big Tobacco funding organisations to attack and discredit the science of cancer – and global warming – is completely okay, it “maximises” human progress, even though their efforts have measurably slowed efforts to prevent cancer and to slow global warming, which in the long term will lead to many many deaths.

No, it’s not okay. I think in the long term it costs profits as the firms wreck their reputations. Also I think it is perfectly fine for other people to boycott firms (be that as investors, workers or consumers) which they disapprove of.

Shilling and swift-boating are examples of things which will always be legal, and are always immoral and often destructive, but Tracy W thinks that they have “maximized” human welfare

No. I argue that a firm that is making a profit in a system with good property rights is a decent guide to say that it is making social returns.

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Cliffy 07.24.08 at 11:43 pm

sg, I don’t think you’re right that swiftboating isn’t illegal, or at least has legal consequences — it certainly could be the subject of a libel suit. And so, there’s already an economic reason to avoid this. (And of course, Big Tobacco did in fact end up in legal trouble for the very actions you mention, although it certainly took too long.)

As to the notion that corporate fatcats are absolved of moral responsibiilty, I didn’t say that and there’s nothing in my view that demands it. Those individuals are held to the same moral standards as the rest of us. But it’s the same thing as the pharmacists who refuse to give out birth control. We’re paying these dudes to do a job — dispense medicine or increase wealth. As long as they’re deciding their personal views of right and wrong — whether we agree or no — trump their professional responsibility, they are not doing that job. Ergo, if we as society want corporations not to engage in X behavior, **criminalize** it. Otherwise, if it’s profit maximizing, they are failing in their role by turning their nose up.

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Tracy W 07.24.08 at 11:49 pm

mpowell: The economy with a system of good property rights that Tracy is so enamored with is a complete fiction.

Gosh. If you live in the Western World, you live in a society with incredible levels of wealth, low levels of violence, of corruption, average human life expectancy at birth over 70 years, slavery is illegal. And yet you have the blindness to type “a complete fiction”. Go read some history.

But ultimately, Tracy doesn’t have a good argument for encouraging responsible corporate behavior.

Yes I do. It’s called profit-maximisation in a system of good property rights. For example, if we want to reduce greenhouse gas emissions, we should set a cost on emitting greenhouse gases.

An advantage of this is that it also applies to governments, religious organisations, charities, private individuals etc.
I think the people on this board who are arguing about corporations’ responsibility are displaying an odd blindness about all the other organisations we have in society.

The more important part of this debate is, “how do we get corporations to do what we want?”. It’s not just about arguing what their goals should be. It’s about how we get them to pursue the goals we want.

My argument is that the more goals a corporation has the less likely it is to achieve any one of them. If you want to pursue a separate goal to profit-maximising, isn’t the logical thing to do to set up a separate organisation?

You don’t want to interfere too much or your risk destroying this amazing profit-generating machine. But having rules and restrictions governing board membership are a good way to push companies to behave in more desirable ways and to check particularly nasty behavior before it really gets going.

I am not an American citizen, but I understand the USA has a lot of laws too. Of course, laws by themselves are not necessarily good, it depends on the content of the law.

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Slocum 07.24.08 at 11:51 pm

Neither Freidman nor Posner actually mean what they’re saying, though. At least I’d put a really hefty wager on the idea that Posner is not in favor of being repeatedly kidnapped and held for ransom by proprietors of unsuccessful businesses, even though kidnapping is lucrative and low in operating costs.

Lefties seem to believe the oddest things about libertarians. Why would anyone suppose that Friedman and Posner would favor profit maximizing via criminal activity? Or societies where kidnapping was not illegal?

Corporations actually need clear rules and need them to be enforced — otherwise they may find themselves in the difficult position of choosing between cheating or losing their business to competitors who do — the same sort dilemma that has been faced by many elite-level athletes.

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Tracy W 07.24.08 at 11:54 pm

SG: This isn’t quite up to the rest of your arguments, Tracy. “People” is misleading. Usually many, many people are destroyed before some other people figure out how to avoid that fate. “Slowly” is also misleading. It ought to be “Far more slowly than necessary.” “Wonderfully better than it could be” is, I think you’ll agree on reflection, a meaningless phrase without further specification.

I suppose it depends on your starting point. I read a lot of history. I’m amazed at how good things are nowadays compared to the normal situation of humankind. If you want a starting point – well, read some British history. I just came across an estimate recently that 1/6 of England’s population was killed during the War of the Roses.

I think a better phrase in current circumstances would be “nowhere near as good as it might be if clever people like me would devote some of the ingenuity I’m spending here defending the social utility of maximizing profits to helping figure out how to write laws and regulations that would minimize the corporate and financial greed and guile that cause so much waste and needless suffering.”

Well firstly, I think it’s silly to focus on corporations like you do here. All sorts of organisations cause suffering, and so do private individuals.

Secondly, I fail to see how corporations pursuing multiple goals, rather than focussing on profit-maximising, will minimise corporate (or religious or government or sports or etc) financial greed and guile.

Thirdly, I think global warming is a far bigger threat than corporate greed, guile etc.

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seth edenbaum 07.24.08 at 11:56 pm

I’ll try it again:
instrumentalism is a subset of communicative action, not the other way around. It’s a filtering and a streamlining procedure.
Dancing is not racing. You’re making all human activity a subset of a race. The morality or lack thereof of racing is a side issue. Your argument begins with illogic.

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Manager Relationship 07.24.08 at 11:57 pm

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Pope Ratzo 07.25.08 at 12:02 am

I’ll have to learn a little more about this “creative capitalism”. Although I’ve heard the term before, I’ve never heard it from someone that I respect before this.

One thing that’s always made me doubt this possibility is the fact that quite a few cultures don’t even have the notion of personal capital. The idea that you would own your own property or that you would leverage your property in order to increase your wealth so that you can own more property just doesn’t exist in many places.

I think of villages in Tanzania or Kenya where property does not pass to someone’s heirs but rather at the whim of the chief, who decides who gets to live in that nice house with the fertile fields and if you happen to have lived there before your dad died, well, you just have to go. This is of course, a more stark example than most, but still, this notion of entrepreneurship that we fetishize in the US is very foreign to a lot of people in the world, and some of them are better off than we are.

But I trust you, so I’ll dig into this creative capitalism of which you speak.

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Pope Ratzo 07.25.08 at 12:08 am

Oh, in regards to the charitable donations of conservatives, I’d suggest that the stats would be different if you compared the actual giving as opposed to just the amount that was claimed as an income tax deduction.

I happen to know a lot of very liberal Christians, and they’re inclined to not seek either thanks OR fat tax deductions from their charity. In fact, they’d just as soon nobody know, often not even the recipient of their charity. See, that’s the way it’s supposed to work.

When I see these “statistics” of how “conservatives” are “more generous” than “liberals”, usually seen in the writing of conservative bloggers and radio hosts, I am reminded that if you point it out, then it’s not charity at all, really. That’s for the people who are mentioned in the New Testament as “sitting in the front of the church”.

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Tracy W 07.25.08 at 12:10 am

SG:I presume, Tracy W, that you think that this is the “fastest, easiest” way for them to improve the lot of their fellow humans?

If it is profitable, then they are saving on services for which there is no demand and freeing up resources for something else.

I presume also that you think a land mine company lobbying against treaties banning landmines is finding the “fastest, easiest” way to improve the lot of all those Cambodian kiddies who get blown up?

Now this is one of the times when making a profit is not a decent guide. On the other hand, I have no idea how to limit corporations, charities, the military, religious orders, civil associations, etc so that they can only lobby for laws that I think are good.

I think however that improvements are likely to come from changing the laws under which government operates, not by expecting corporations to pursue multiple goals.

I wonder Tracy W how you would like it if you lived in a society where family doctors only ever considered the welfare of their bottom line, rather than the broader social and public health implications of their work, when they opened and managed their services?

Family doctors are not corporations. If a family doctor (or anyone else) wants to improve public health, then they should pick the best means by which they think they can improve public health and set up (or join or donate to) an organisation that is focussed on that goal. Be that studying infectious diseases, or improving water supplies, or handing out condoms. I don’t see any benefit to trying to both pursue financial profits and other goals in the same organisation.

If family doctors want to pursue some other social goal that does not involve public health or making profits, then they should again set up (or join, or donate to), an organisation that is focused on that social goal. Same is true for anyone else, regardless of profession, who has such goals.

If family doctors want to donate some of their professional services, that’s fine with me.

We generally, i think, expect child-care chains to consider social good rather than just profits. But perhaps you think a child care company valuing the well-being (rather than just the physical safety) of its charges is a case of it doing “too many things” at once?

You think that the parents who put their kids in child care only care about the physical safety, not about general well-being? After all, if parents care that their kid, say, has a happy time, and they care for that more than the cost of providing a kid with a happy time, then it’s profit-maximising for a firm to provide a happy time.

We already have laws against child neglect, those of course apply as much to corporations as to private individuals, such as parents, who care for kids. Beyond that, parents are best placed to make their trade-offs.

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Cliffy 07.25.08 at 12:16 am

Me: As long as they’re deciding their personal views of right and wrong—whether we agree or no—trump their professional responsibility, they are not doing that job. Ergo, if we as society want corporations not to engage in X behavior, criminalize it

Reading over this, I think I can say it more clearly this way. Let’s us decide **as society** what are appropriate and inappropriate behaviors for corporations to engage in — not depend on the personal, contingent senses of corporate officers, or pharmacists, or cops, etc. And then, if we have signalled that something is OK, we can’t get stroppy about it when they do it. (Although we can certainly pass a law that changes the rules in future.) And if they don’t do it, they’re taking money not just themselves, but anybody who has invested in the company.

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theo 07.25.08 at 12:32 am

Lefties seem to believe the oddest things about libertarians. Why would anyone suppose that Friedman and Posner would favor profit maximizing via criminal activity? Or societies where kidnapping was not illegal?

They’re obviously reductios ad absurdum, but the thing that really baffles liberals (with economically moderate tendencies) is: where do libertarians draw the line between normal amoral corporate behavior and amorality which is beyond the pale?

Many libertarians defend corporations who create enormous external environmental harms, risk the lives of their workers, etc. Kidnapping does not actually lead to loss of life, and would seem to be more defensible.

(The flip side of this problem is, once you allow creative capitalism, what ancillary goals should be corporate obligations. This problem solves itself, because investor self-interest and corporate lobbying are both countervailing forces. In contrast, the only countervailing forces to rampant corporate environmental exploitation are occasional outbreaks of populist government, and sometimes trial lawyers).

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Bruce Baugh 07.25.08 at 12:35 am

Slocum, I know a fair amount about various flavors of libertarianism. I’m just trying to make a simple point: when pushed, most arguments about things like profit maximization turn out to mean “…within an ethical framework I’m assuming, and within a legal framework I’m also assuming”. Non-libertarians are saying that we don’t wish to grant those ethics and laws as given, but would instead prefer to discuss them, their making, and their consequences, because changes to them may affect “profit maximization” a little or a lot.

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Roy Belmont 07.25.08 at 1:06 am

Tracy W-
“I just came across an estimate recently that 1/6 of England’s population was killed during the War of the Roses.”

And I just came across an estimate recently that:

“Over 1 billion people—1 in 6 people around the world—live in extreme poverty, defined as living on less than $1 a day.”

And:“Thirdly, I think global warming is a far bigger threat than corporate greed, guile etc.”

The root causes of global warming are still, even at this late hour, perfectly legal. And provably a direct result of “corporate greed, guile etc.”
Back home we’d say that with that statement you done shot yourself in the foot.

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bad Jim 07.25.08 at 6:20 am

It’s probably not even the case that corporations in general work to maximize long-term profits. Rather, they attempt to increase the price of their stock from quarter to quarter. The last thing they want to do is pay dividends, after all, even with the recent changes in American tax law reducing the tax on dividend income.

Managers are given stock options as incentives, which are only valuable when the stock price goes up. Institutional investors share the same short-term perspective. Among the results of this short-term stock price focus is a fondness for actions with short-term benefits and long-term costs, like acquisitions and layoffs. Many firms would be better run if they actually did attempt to maximize their profits rather than their managers’ capital gains.

Focusing on long-term profits might even entail taking care of all the stakeholders – the customers, the workers and the community – instead of privileging first the hireling managers and then the shareholders, none of whom tend to have long time horizons.

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sg 07.25.08 at 7:12 am

Tracy W and cliffy, your defenses both rest on the assumption that it is not possible for corporations amoral behaviour to be profitable for them. You imagine a legal and market framework for the corporation which prevents their amoral activities from positively affecting them. For example, Tracy W about Big Tobacco:

I think in the long term it costs profits as the firms wreck their reputations. Also I think it is perfectly fine for other people to boycott firms (be that as investors, workers or consumers) which they disapprove of.

This is arrant naivete. Not only does it ignore the much greater damage to their profits from the alternative – admitting their product is harmful and agreeing to restrictions on its sale – but very few people do know about it, so it hasn’t damaged their reputation that much. What has damaged Big Tobacco’s reputation is the knowledge that their products kill, and that they sell them anyway – and they fought long and hard to hide that knowledge.

In response to my point about shilling, Tracy W says

I argue that a firm that is making a profit in a system with good property rights is a decent guide to say that it is making social returns.

which is classic naive libertarianism. What is this system of property rights which will stop a group of concerned corporations funding a front group to do their dirty work ? What does it even have to do with property rights? And is our system of property rights as now existing really so weak that it is the cause of the corrupt lobbying and influence networks we see protecting Big Oil? I don’t think so…

Cliffy says similar things.

There also seems to be this assumption that corporate leaders should be held to the same responsibility as the rest of us. Putting aside that a law of fiduciary obligation actually holds them to a lower responsibility than the rest of us, I should point out that this is in any case a very dodgy line. Do we hold Doctors to the same standard as the rest of us? What about our politicians and Generals? Society expects different things of different people, generally expecting more of people with more power. Big corporations have a lot of power, and in exchange for getting a lot of power (and money) these people have a higher responsibility to use it wisely. They hold a lot of peoples’ jobs in their control, they have a big influence on the environment, some are the size of small economies. At the very least they should be provided with a legal framework to protect them when they decide to behave morally in ways which the law does not yet cover. And we shouldn’t be pretending that a “system of property rights” is going to cover all aspects of behaviour.

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sg 07.25.08 at 7:40 am

Also Tracy W, your argument that it’s more efficient for companies to set up charities than incorporate their moral considerations into their main business is precisely arse backwards. Bill Gates has been in the news recently because his company has been engaging in exactly the business practices which his Foundation pays organisations to ameliorate the effects of.

It’s almost as if the Bill & Melinda Gates Foundation enables Microsoft to continue certain shoddy business practices…

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Bruce Baugh 07.25.08 at 9:00 am

Bad Jim’s #83 makes an important point: the emphasis on improving the quarterly stock price leads routinely to diminished profits in the long term. A case in point might be American auto makers like GM, who are screwed, blued, and tattoed any time the market changes because contingency planning doesn’t help the quarterly stock price and therefore generally isn’t done. They have no Plan B.
Note that Hayek and Friedman alike recognized this. Hayek, not being an enthusiastic part of the actual corporate-political culture the way Friedman was, criticized it more thoroughly, but even Friedman had his moments of wishing for something more sensible and *gasp* sustainable. It wasn’t until the movement conservative machine really got its act together in the push to elect Reagan that all forms of long-term thinking fell into utter disrepute.
What people like Posner are doing now is just providing window dressing for concepts that would otherwise labor on the un-technical label of folly.

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abb1 07.25.08 at 9:58 am

Pre-Reagan economic model was much less predatory, but it still seem extremely naive to believe that it was promoting any “social goals”, other than accidentally.

Stupid farmer slaughters all his sheep at once and devours the meat until he passes out. Smart farmer takes good care of his sheep, and butchers just one for dinner once a day. Neither one of them, of course, cares about sheep’s social goals. If they were, they wouldn’t have been farming, they would’ve been PETA activists.

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MDHinton 07.25.08 at 10:03 am

66 – SG – you really ought to see someone about your George Bush fixation. What will you think about when he leaves office?

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Freshly Squeezed Cynic 07.25.08 at 10:36 am

66 – SG – you really ought to see someone about your George Bush fixation. What will you think about when he leaves office?

God, MDHinton, you do love crude generalisations and strawmen as a substitute for argument, don’t you.

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Bruce Baugh 07.25.08 at 11:10 am

Abb1: Okay, point taken. Cancer can be better in some ways than deliberately soaking yourself in hydrochloric acid without actually being good.

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Slocum 07.25.08 at 11:12 am

In contrast, the only countervailing forces to rampant corporate environmental exploitation are occasional outbreaks of populist government, and sometimes trial lawyers

Oh, please. Those industrialized countries with the least environmental exploitation and degradation are those where business has been constrained, on a continuing basis, for many decades, by environmental laws — not ‘occasional outbreaks of populist government and trial lawyers’. In contrast, those places on earth with the most damage are those where industry was developed outside capitalism and the polluting industries were state-owned (the Soviet Union and Eastern Europe).

Governments turn out to be much worse at applying environmental laws to themselves than to independent corporations and, at least as important, wealthy citizens are much more willing and able to demand a clean environment than poor ones (and capitalist countries are much more able to produce the necessary levels of wealth for environmental concerns to become priorities).

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Tracy W 07.25.08 at 11:27 am

Roy Belmont: “Over 1 billion people—1 in 6 people around the world—live in extreme poverty, defined as living on less than $1 a day.”

“The proportion of the developing world’s population living in extreme economic poverty — defined as living on less than $1 per day ($1.08 in 1993 dollars, adjusted to account for differences in purchasing power across countries) — has fallen from 28 percent in 1990 to 21 percent in 2001.”
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/0,,contentMDK:20153855~menuPK:373757~pagePK:148956~piPK:216618~theSitePK:336992,00.html

The root causes of global warming are still, even at this late hour, perfectly legal. And provably a direct result of “corporate greed, guile etc.”

Nope, they are not a direct result. We, as in humans generally, want cheap transport, warm homes, cheap energy. This is true regardless of whether corporations exist. In NZ, there is one major coal-fired power plant. It is owned by the currently-Labour government (a government that is in coalition with the Green party). It is still in operation because NZ people don’t want power blackouts. Or large hydro dams near them.
There’s a lot of Eastern European countries who are going to meet their Kyoto targets easily because in 1990 they had a hell of a lot of inefficient CO2-producing industries from the Communist era. If global warming was a direct result of corporate greed, guile, etc, then Communist countries would not have been producing CO2 like mad.

The problem isn’t the corporations. It’s us humans.

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Tracy W 07.25.08 at 11:48 am

bad Jim : It’s probably not even the case that corporations in general work to maximize long-term profits. Rather, they attempt to increase the price of their stock from quarter to quarter.

Stock prices go up or down based on estimates of the future earnings of that company, and thus the value of owning a share in it. When firms announce R&D investments, which typically only return their profits in the long-term, their share prices on average rise. See for example http://findarticles.com/p/articles/mi_m4130/is_n1_v25/ai_18515595/pg_1?tag=artBody;col1

There’s some more complexity to it than that (the linked study talks about different reactions to different types of firms making R&D annoucements), but if stock prices were myopic, we should see all companies stock prices declining if they announced an R&D investment.

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MDHinton 07.25.08 at 11:55 am

89- Freshly Squeezed – Where is the crude geralisation in pointing out to someone who keeps mentioning Bush and the Iraq war in a thread about the responsibilties of corporations that he may need psychological help? And straw men, what straw men? And why would I need arguments when I wasn’t trying to argue anything. I just quoted something from someone else’s link which I thought was interesting and sat back to watch the predictable reaction of ‘That’s not true, it doesn’t fit my prejudices so it must be wrong.’ Thanks for giving me the satisfaction.

Finally, as I wondered before, why are you people always so rude?

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Bernard Yomtov 07.25.08 at 11:58 am

most arguments about things like profit maximization turn out to mean “…within an ethical framework I’m assuming, and within a legal framework I’m also assuming”. Non-libertarians are saying that we don’t wish to grant those ethics and laws as given, but would instead prefer to discuss them, their making, and their consequences, because changes to them may affect “profit maximization” a little or a lot.

Bruce Baugh makes an excellent point. Why exactly do Posner and others insist that the profit-making must be done legally, for example? Isn’t it a violation of their notion of fiduciary responsibility to obey the law when you can make more money not obeying it? Or why not, as in Bruce’s earlier example, provoke a war in order to increase sales of arms, or prosthetic devices. That can even be done legally.

Either there are ethical and legal limits or their aren’t. If there are why don’t they extend to treatment of employees, relations with the surrounding community, and so forth?

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Tracy W 07.25.08 at 12:11 pm

Sg You imagine a legal and market framework for the corporation which prevents their amoral activities from positively affecting them.

This is typically an essential step. Before we can create a legal and market framework, we have to imagine it first. It’s hard to lobby for a law change if you don’t know what you are lobbying for.

This is arrant naivete. Not only does it ignore the much greater damage to their profits from the alternative – admitting their product is harmful and agreeing to restrictions on its sale – but very few people do know about it, so it hasn’t damaged their reputation that much. What has damaged Big Tobacco’s reputation is the knowledge that their products kill, and that they sell them anyway – and they fought long and hard to hide that knowledge.

So despite thinking this is arrant naivete, you also agree with my statement that they’ve harmed their reputations. Confusing, but nice to know I have your agreement.

What is this system of property rights which will stop a group of concerned corporations funding a front group to do their dirty work ? What does it even have to do with property rights?

I don’t know. I also don’t know what system of property rights stop any organisation from lobbying for bad laws. What’s the system of property rights that stops a bunch of activitists from lobbying the government to do their dirty work? What’s the system of property rights that stops unions of prison guards from lobbying the government to send more people to prison? What’s the system of property rights that stops religious groups from lobbying the government to ban people mocking their religion?

Many commentators on this blog apparently have a blinkered view of the world. The idea seems to be that only corpporations ever do evil. It’s an odd view.

And is our system of property rights as now existing really so weak that it is the cause of the corrupt lobbying and influence networks we see protecting Big Oil?

How about the corrupt lobbying and influence networks that surround education? Or the corrupt lobbying and influence networks that surround public art? Or the corrupt lobbying and influence networks that surround justice systems?

Having clean government is tough.

Do we hold Doctors to the same standard as the rest of us? What about our politicians and Generals? Society expects different things of different people, generally expecting more of people with more power.

Society may indeed expect more of people with more power. That doesn’t mean those people with more power can deliver. A doctor is a person with extensive training in medicine. I do not expect my doctor to also be competent at dentistry, poetry, writing legislation to reduce global warming or installing clean drinking water systems. I expect a general to be good at fighting wars. I don’t expect him to be an expert neurologist or at preventing teen drinking or in the delivery of quality education systems.

Just because someone is good at running a big corporation doesn’t mean they can do everything well. A CEO is not a philosopher king, they have no particular ability at making non-monetary decisions about where society should go. That’s the jobs of politicans and of us as voters in a democracy. I am surprised at how many commentators on this post are so eager handing over such important decisions to non-elected people with no track record of being good at making such decisions.

There’s a lot of social commentary that corporations should do this and that which I frankly think is delusional. Expecting something doesn’t mean you’re going to get it. Doing good is hard. Doing good when you don’t have profits as a guide is even harder. I don’t see any reason to believe a CEO is any better at it than any other random person picked off the street.

Bill Gates has been in the news recently because his company has been engaging in exactly the business practices which his Foundation pays organisations to ameliorate the effects of.

Microsoft has been infecting people with malaria? Seems a bit odd for a software company. I wonder how they make a profit out of that.

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Tracy W 07.25.08 at 12:17 pm

If there are why don’t they extend to treatment of employees, relations with the surrounding community, and so forth?

Firstly, ethical treatment of employees, surrounding community, etc, often maximises profit in the long-run.

Secondly, if there is a trade-off between maximising profit and serving some other value, how does a company know what is the best to choose? Say you keep a factory open even though it is not at all profitable in the long-run, because you feel you have a “responsibility to the surrounding community”. That means you are spending resources keeping the factory open. What could those resources create elsewhere in the world? How many communities are you harming, how many other people are you harming, by this waste in resources? How are you to know what the right trade-off is?
What the price system does is that it coordinates the use of resources and creates pressures that drive resource to their most efficient uses, taking into account everyone in the trading system, not merely those who happen to live next to a factory.
Call me a mad democrat, but if we are going to interfere with that system and decide that one community is more deserving of resources than another, I think it should be done by democratic processes, where the other communities at least gets a chance to make their say, not by unelected managers responding to some vague notion of social responsibility.

I am really really surprised at how eager many commentators on this blog are to turn important decisions over to corporations.

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Freshly Squeezed Cynic 07.25.08 at 12:34 pm

I just quoted something from someone else’s link which I thought was interesting and sat back to watch the predictable reaction of ‘That’s not true, it doesn’t fit my prejudices so it must be wrong.’ Thanks for giving me the satisfaction.

The point was, of course, someone came up with good reasons why the link and related studies might just possibly have other explainations than “lefties are mean”. Including, as I pointed out before, people such as those at the Volokh Conspiracy, whose prejudices would be confirmed by “but lefties are mean”, but still had qualms with the way the study they were looking at.

Your response has been to dismiss the points raised with claims of leftist bias, even though it’d be ridiculous to say that in this case, to say “but lefties are rude.”, and to generally talk in a passive-aggressive way which is frankly the height of rudeness in and of itself, which makes a mockery of any pretense that you are trying to make that “oh, dear, people are being so rude to you! Those awful lefties.” When you call people “fixated”, “mean” and caricature their points without even pretending to understand them, you’ll tend to find that people get the tinyest bit tetchy.

So, to be polite, forgive me if I am somewhat unenthused by your response.

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abb1 07.25.08 at 12:40 pm

Bruce Baugh, but I’m not saying it’s a cancer, it’s a normal stage. It organizes production (though sometimes they also destroy production), introduces innovations (though sometimes they also squash innovations) and so on, these are good things. They don’t care about “social goals”, but I don’t think they even pretend they do. As long as that’s understood, it’s fine with me.

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MDHinton 07.25.08 at 12:47 pm

98 – What makes you think I’m not a lefty? I never said ‘lefties are mean’ I quoted a comparison between conservatives and liberals. I thought it was interesting. I never said ‘lefties’ are rude. You interpreted ‘you people’ to mean ‘lefties’. It would be ridiculous to say ‘people with left of centre political views are rude’.

I dismissed the points raised against the statistics because they seemed to be more like gut reactions against the idea of generous conservatives than empirically backed up findings. I’m sorry if I offended your friends at Volokh, it was already past my bedtime when I read their article.

I certainly did not mean to be rude to you.

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Bernard Yomtov 07.25.08 at 1:44 pm

Firstly, ethical treatment of employees, surrounding community, etc, often maximises profit in the long-run.

Sometimes, maybe, occasionally. But the whole libertarian reliance on how how profit-seeking leads naturally to ethical behavior because of reputation etc. is seriously overblown.

Secondly, if there is a trade-off between maximising profit and serving some other value, how does a company know what is the best to choose?

It, or rather its management, uses its brains. Just like you do, presumably, when you decide what values take precedence in some situation. Even a pure profit-maximizing company has to make judgment calls all the time about what projects to pursue, who to hire, etc.

What the price system does is that it coordinates the use of resources and creates pressures that drive resource to their most efficient uses, taking into account everyone in the trading system, not merely those who happen to live next to a factory.

In the early chapters of the textbooks it does that. read further and you might find some problems. In fact it often ignores the perfectly valid special interests of those who live next to a factory.

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seth edenbaum 07.25.08 at 1:53 pm

I will try a third time and then give up:
“Firms are obligated to act in the interest of stockholders or more specifically in Richard Posner’s formulation, to maximize corporate profits.”
And members of those firms are also members of a community and are obligated to other members of that community.
A soldier in an army in service to a democracy is a rule following cog in an authoritarian system in service to himself and fellow free citizens who are free to refuse any number of orders that as a soldier he cannot. You figure it out. And do not try to foist on me the idea of the “creative military”

Corporations have obligations to shareholders. Their operators have other obligations as well, but not as corporate drones as such.

You’re modeling society as first as capitalist function and not as social activity.
COMMUNICATION IS NOT A SUBSET OF INSTRUMENTALISM!!

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paul 07.25.08 at 2:15 pm

Seems to me that Friedman is in many ways arguing in favor of creative capitalism. He doesn’t talk about just staying within the law, but about staying within the ethical framework of the surrounding society. And if that ethical framework includes giving back to the community, as most ethical frameworks to the left of Old Haiti tend to do, QED.

I’m also rather amused by the implicit assumption from most profit/ROI maximizers that shareholders live on a separate planet, where none of the things that corporations do affect them, except for the almighty dividend and capital gain. (Of course, this view also tends to be held by US courts, which have consistently taken the position that someone who holds a stock for 100 milliseconds has at least as much right to determine corporate policy as someone who holds it for 10 years…)

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Tracy W 07.25.08 at 2:16 pm

It, or rather its management, uses its brains. Just like you do, presumably, when you decide what values take precedence in some situation.

And we have seen what happens when someone decides they have the right to determine what’s good for other people. Central planning failed because the problem of the most valuable distribution of goods is too difficult to be solved by a human brain. What prices do is coordinate the collective decision-making process about how resources are to be used. They may not do it perfectly, but they’re better than the human brain by itself is.

I can decide for myself what values take precedence in which situation. But that doesn’t mean I can decide what values take precendence for other people. I can’t even know all their values. I can’t even know all the resources that are available.

And I don’t believe that just because someone happens to be a manager of a profitable corporation that they can therefore decide which values take precedence any better than a democratic process can.

Even a pure profit-maximizing company has to make judgment calls all the time about what projects to pursue, who to hire, etc.

However in this case it has prices to guide it. That’s the key difference. Take away the prices, and why do you expect a corporation to make better decisions than a democratic process?

In the early chapters of the textbooks it does that. read further and you might find some problems.

For some bizarre reason, my economics textbook failed to even mention an argument as to why the best way to solve market failures is to tell an unelected corporation to decide on the right solution.

In fact it often ignores the perfectly valid special interests of those who live next to a factory.

Because the correct process for deciding if those who live next to a factory have valid special interests, and the extent of those special interests, is a democratic one. The people who think that they shouldn’t have special interests deserve to have a right to have their say.

I’m sorry, your line of argument just strikes me as crazy. As far as I can tell, the sum total of your argument is:
1. Markets fail.
2. Something must be done about this.
3. Telling corporations to solve those failures is something.
4. Therefore we should do that.

I’m going to propose an alternative line of argument:
1. Markets fail.
2. Something must be done about this.
3. Bernard Yomtov giving Tracy W all his/her money is something.
4. Therefore we should do that.

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Bernard Yomtov 07.25.08 at 3:25 pm

Tracy W.,

You wildly misunderstand.

my economics textbook failed to even mention an argument as to why the best way to solve market failures is to tell an unelected corporation to decide on the right solution.

I do not ask an unelected corporation to make decisions for the entire society. I ask it to govern its own behavior in accordance with ethical principles. Sometimes this will involve difficult decisions, sometimes easy ones.

I simply believe that corporations have a responsibility to act ethically, over and above meeting bare minimum legal requirements.

This would include, for example, not dumping toxic waste into the water supply even if that is the most profitable course of action. Apparently, you are unable to figure out that that is a bad idea unless someone puts a price tag on it. That is your foolishness, not mine.

Should rules about business behavior be made democratically? What if the local government is undemocratic? Or the rule unenforced? Is the corporate manager now exempt from ethical obligations? You seem to think so. I don’t.

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geo 07.25.08 at 4:28 pm

John Quiggin: With your post, you loosed Tracy W., with his/her inexhaustible polemical stamina and very clever but exasperatingly superficial arguments, on the rest of us. Please accept resp0nsibility for it by offering us a lengthy, detailed reply to those arguments.

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J Thomas 07.25.08 at 4:40 pm

If global warming was a direct result of corporate greed, guile, etc, then Communist countries would not have been producing CO2 like mad.

What is the difference between a communist country and a libertarian nation that has one monopoly running the whole economy?

Mmmm. Everybody in the country has one share, and they have corporate elections where you get to choose the managers. What’s missing is you don’t get to sell your share. Everything else fits. Except the rhetoric where they claimed the profits all went to benefits for shareholders or got plowed back into investment, and not siphoned off into management perques. The rhetoric was phrased differently.

I’d figure the communist countries are an abject lesson in what happens when corporations get too large and unwieldy. They stop making good adaptive decisions, but instead get their profits by being so big that the rest of the economy has to adapt to them.

This has legal implications. Perhaps we would be better off if corporations were limited in size. Say, no more than 300 employees each. Larger entities could be loose coalitions of companies that buy each other’s services, perhaps they could be required to have no contract longer than, say, two years.

And we would almost certainly be better off if no corporation was allowed to lobby, directly or indirectly. Corporations tend to be good at doing one thing and not many things, and if the one thing a corporation is really good at is lobbying, that is probably bad for the nation. Let the corporation’s stockholders and employees lobby for it, if they choose to do so with no prompting from the corporation.

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J Thomas 07.25.08 at 4:44 pm

Secondly, if there is a trade-off between maximising profit and serving some other value, how does a company know what is the best to choose?

Somebody has to make the choice. You seem to be saying that they should not make the choice at all, they should ignore the trade-off and maximise profit unless there are legal restraints that impose the other value.

When you do that, *you* are making the choice for them.

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sg 07.25.08 at 5:13 pm

Tracy W, you’re showing your ignorance here. The Bill & Melinda Gates Foundation invests a lot of money so that it can maintain the value of its fellowship. A lot of this money is invested in the very corporations which are doing damage in the 3rd world where the Foundation works. For example, the Foundation has money invested in chocolate companies which have been sued for using child labour; it has investments in tobacco packaging companies. Yet it funds child health schemes in the 3rd world. Do you get the inefficiency? It’s robbing Peter to pay Paul.

You also seem to have twisted the arguments around so that you are no longer defending what you set out to defend. The whole discussion is about whether corporate leaders should be defended from legal action if they choose to consider more than just the maximisation of profits. You are now starting to argue as if the original point was that corporations should be required to do this, or required to represent all of society’s interests. This is not the point.

I also note that after i said this:

This is arrant naivete. Not only does it ignore the much greater damage to their profits from the alternative – admitting their product is harmful and agreeing to restrictions on its sale – but very few people do know about it, so it hasn’t damaged their reputation that much. What has damaged Big Tobacco’s reputation is the knowledge that their products kill, and that they sell them anyway – and they fought long and hard to hide that knowledge.

you pretend this:

So despite thinking this is arrant naivete, you also agree with my statement that they’ve harmed their reputations. Confusing, but nice to know I have your agreement.

which is a complete misrepresentation. My original point was that the tobacco companies shilled and lied about cancer to try and prevent their profits being reduced through legislation. You argued that their having done so had damaged their profits by spoiling their reputation. This argument is silly because a) their profits would have been much less severely damaged by having their reputation spoiled than by having their product BANNED (which causes 0 sales and would have been the consequence of their not using their considerable lobbying power); b) the damage to their reputation which you suggest occurred (due to their having lied) is nowhere near as great as the damage which they are now suffering due to the actual reputation of their actual product. This damage is what they tried to put off by lying and lobbying, a legal but immoral activity which you claim maximizes everyone’s welfare.

Your arguments rely on naive assumptions about a) what corporations do now, and b) what “a system of effective property rights” can actually prevent corporations doing. They also are increasingly aiming at a skewed version of the original argument, which is simply that corporate leaders shouldn’t be sued for choosing to behave morally.

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mpowell 07.25.08 at 5:37 pm

Tracy, you continue to make many assumptions, logical errors so typical of this point of view.

Let me point out that you still haven’t made a real argument for firms to only pursue profits other than: it’s too confusing to have them pursue other goals simultaneously. So we agree that this is really just a question of what is most efficient at getting a result we both value.

But then you also turn around and consistently insist that behaving immorally is not a profit-maximizing behaviour. So, you are trying to get your cake and eat it too with this one. Now, regardless of what kind of silly arguments you come up with to show how this is the case, in the real world, companies pursue extremely immoral ends frequently enough that coming up with well-known examples is hardly challenging. So it seems that asking companies to pursue a profit motive alone has proven problematic in many cases.

Furthermore, let’s just retire the straw man argument that b/c my view of ideal capitalism differs from your view of ideal capitalism that I am in denial of all the wonderful benefits that modern capitalism has brought us. It’s amazing that I would have to even address this, but it is amusing to me that there is a certain class of people that assume (for whatever reason) that the benefits of modern civilization flow primarily from their purified version of market capitalism that has never actually existed in the real world.

And this brings me to my final point: I suppose we could disagree about the level of corruption present in our economic system, but speaking about relative levels of wealth or violence says nothing about the integrity of the system of property rights that we maintain. I would argue that we have achieved these substantial levels of wealth in spite of the substantial levels of corruption and unfairness in our economic system. Which is fairly remarkable. But I also believe we could do better. The system of ‘good property rights’, is a farce, in my view, b/c of the tight interconnect between lobbying, business law and business practice. For many large corporation, rent-seeking is an important part of your tool box for beating your competitors and extracting more from your customers and suppliers.

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Patrick 07.25.08 at 6:44 pm

I’m going to try to put it as simple as possible:

The assumption of many people is that the pursuit of profit is simply that, the pursuit of profit, without regard to any moral standards. In the strict (and not really pejorative) sense, “amoral.”

Capitalists don’t like that, and want to prove that the pursuit of profit, in and of itself is moral, and in fact, more moral than seeking other goals like fairness to employess, stewardship of the environment and other social goals.

In other words, what they want is a healthy dose of praise to go with their money.

(I’m sure someone will satirize holier than thou, bien pensant, liberals. Have at it.)

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Roy Belmont 07.25.08 at 7:22 pm

New Zealand to the nonce, global warming is cars puking exhaust day and night worldwide.
Tricking people who never needed them into driving trucks (SUV’s = station wagons mounted on truck chassis) is only the simplest and most obvious example of corporate guile and greed leading directly to climate disruption.

This was done through the brainwash mechanisms of corporate advertising, and it was done purely and simply to sell more unnecessary metal per customer, and to sell more oil, as gasoline, per customer to move that extra metal around. People bought them because they wanted them but they wanted them because they were tricked into it. By corporate guile and greed.

This has the ancillary benefit of making it easy to get the public to take the blame and the shame for what they were tricked into doing – e.g. causing and exacerbating global warming.
Like smoking, hey it’s all about personal responsibility for personal choices.

The only way that transaction can be said to be driven by consumer demand is by eliding the process which artificially generates and maintains that demand.

If you’re going to insist those consumer demands and transactions are naturally arising and no more than an expression of spontaneous material desire you’re egregiously dishonest.
And your foot is hemorrhaging.

114

J. Nicholas Smith 07.25.08 at 10:04 pm

“And there’s no obvious reason why socially concerned managers couldn’t conclude that the strategy that yielded them the best expected personal value”

Managers are the agents of the owners. Maximizing their personal value over that of the owners is theft from the owners. It is the same act as a trustee of a minor’s property embezzling the trust.

With this understood, we can analyze the statement:

“But this doesn’t mean that the probability of firm survival is maximized by maximizing profits.”

It is not the job of managers to maximize the probability of the survival of the firm; it is to maximize the return to the owners of the company who employ them. If the path that keeps the business running for the next two hundred years will return less time-discounted profit over those two hundred years than a flare policy that will cause the company to be fully liquidated in a week, the job of the managers is to follow the flare policy. To do otherwise is to steal from the owners the money that would return from the flare policy.

Of course managers manage for their own best interest, over that of the stockholders, all the time. Each and every such action is an act of embezzlement, even if the law fails to punish it as such.

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John Quiggin 07.26.08 at 12:54 am

geo at 107. Sorry for not responding: it seemed to me that Tracy was doing little more than restating Posner.

As I said at the end of my post, the argument that corporations should focus on profits, and leave managers or shareholders to pursue charitable goals as individuals doesn’t appear to be valid in general. To be more precise, given perfect competition in credit markets and perfectly efficient capital markets, the argument looks pretty good. Otherwise, and particularly if managers actually have a lot of discretionary power, it seems unlikely to hold up. Maybe somewhere in this thread Tracy has addressed my point, but I haven’t seen it.

116

Eli Rabett 07.26.08 at 1:39 am

If the only purpose of a corporation is to maximize shareholder valur, then let us kill off limited liability. Let the greedy live on the high wire.

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J Thomas 07.26.08 at 10:05 am

Of course managers manage for their own best interest, over that of the stockholders, all the time. Each and every such action is an act of embezzlement, even if the law fails to punish it as such.

OK, do we all agree on the first sentence here?

Somebody has to choose. In general, managers choose what to do and mostly they get away with choosing. Most of the time nobody gets to force them to make particular choices. There are some extremely broad legal limits that sometimes constrain managerial choice, sometimes after a disastrous choice managers may face a lawsuit.

Given this apparent fact, isn’t arguing about what managers ought to do a lot like arguing about what the weather ought to be?

118

abb1 07.26.08 at 10:34 am

If the only purpose of a corporation is to maximize shareholder value, then let us kill off limited liability. Let the greedy live on the high wire.

…or at least they should definitely stop complaining about so-called “double taxation of dividends”. Since corporations shield them from liability, there’s nothing wrong with taxing corporate profits and then the individual shareholder dividend incomes again.

119

Leo Beilin 07.26.08 at 6:37 pm

IF the shareholder aka owners of the corporation are informed about the change in goals of management and the board and agree with it,that’s fine. The shareholders who disagree can sell their shares. IF they are NOT informed because management and the board does it in stealth fashion,then they are violating the shareholders trust. Bear in mind the shareholders include not just plutocrats but widows and orphans and charitable organisations that are crucially dependent on rising dividends and share price to achieve THEIR goals ranging from survival to fulfilling their missions. Deliberately curtailing maximal profitability for the sake of stakeholders is laudable as long as it is done by a sole proprietor or group of owners who are fully informed.

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J Thomas 07.27.08 at 2:42 pm

Leo, shareholders cannot be particularly well-informed. If they were, then a competitor could buy one share of stock and learn things that otherwise would require expensive corporate espionage.

If one shareholder learns too much more than the others, and then buys or sells stock, he is guilty of insider trading.

For the most part, management does whatever-the-hell they want, and if you find out enough about what they did to object that means they made a serious mistake. And so, what value is there in deciding what they ought to do?

How is this better than theologians arguing about what God ought to do? How is it better than macroeconomists arguing about what the economy ought to do to maximise human happiness?

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Tracy W 07.28.08 at 7:54 am

Comment 106: I ask it to govern its own behavior in accordance with ethical principles. Sometimes this will involve difficult decisions, sometimes easy ones.
This would include, for example, not dumping toxic waste into the water supply even if that is the most profitable course of action. Apparently, you are unable to figure out that that is a bad idea unless someone puts a price tag on it. That is your foolishness, not mine.

Okay, firstly, I believe in freedom of association. No one is obliged to invest in or work for or buy from a company that dumps toxic waste into the water supply. And I am not aware of any ethical theory that says that working for a company obliges you to turn off your ethics. This means that if everyone followed the extremely common ethical principle of not killing then no company would dump toxic waste into the water supply.

However, even in the most law-abiding society, regardless of whether it happens, there are a few people who apparently have no problems with directly killing people for money – the one thing that every single culture I know about regards as utterly wrong. So, we need law enforcement.

So that’s my answer to the toxic waste problem. In a world where everyone followed the basic ethical principle of “don’t kill people for money”, it wouldn’t happen as no one would take that job at the company. In this world, you need laws and law enforcement.

This raises the more specific question, you say a business should govern in accoradance with ethical principles – whose ethical principles? I’m perfectly okay with companies that manufacture contraception, but I am aware of people on this planet who regard contraception as a great wrong. Should a company manufacture contraception? No one should be obliged to work for a company that manufactures contraceptives, anymore than they should be obliged to work for a company that dumps contraceptive waste. But, if those people who oppose contraception want it shut down, I don’t see that the company is obliged to respond. Unless, of course, those people persuade the rest of us that contraception is wrong.

And then there’s a whole set of difficult tradeoffs. “Don’t kill people for money” is an easy ethics problem. But a lot of things humans do involve a slight increase in the risk of death for a reward in some other sense. For example, when I was a kid my mother used to take us to visit our grandmothers (my grandfathers died too young for us to remember them). This meant travelling on the roads, exposing us kids to the risk of a road accident, for something that was not necessary to save our lives. That hardly means that Mum was morally like a woman who poisons her kids – Mum was trading the risk to our lives against the value of knowing our grandmothers – and I think she made the right decision.

“Don’t dump toxic waste in the water supply” is a good rule, but how about the risk of toxic waste getting in the water supply? For example, a hospital inevitably generates toxic waste, and it is easy to imagine scenarios in which the toxic waste gets in the water supply by accident. There are ways to reduce those risks, eg locking lids on the toxic waste bins, fail-safe designs, if you need to move the toxic waste use a route that avoids the risk of water supplies, but the risk can never be reduced to zero. And each protective measure you take uses up resources that could be used for other things. How does a hospital decide what is the socially-optimal level of risk reduction to take without a price?

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Tracy W 07.28.08 at 8:08 am

Comment 108: Me, originally: If global warming was a direct result of corporate greed, guile, etc, then Communist countries would not have been producing CO2 like mad.

J Thomas: What is the difference between a communist country and a libertarian nation that has one monopoly running the whole economy?

An economy in which one monopoly ran the whole economy would be a communist country. It wouldn’t have the price signals that a market economy relies on as private property wouldn’t exist. The information problem would be overwhelming, and I suspect it would drift the same way communist countries did – into using prices, even artificially determined ones, and separate organisations doing separate things, and a black market.

I have no idea what this has to do with my argument that CO2 emissions are not the direct result of corporate greed, guile, etc.

Me: Secondly, if there is a trade-off between maximising profit and serving some other value, how does a company know what is the best to choose?

J Thomas: Somebody has to make the choice. You seem to be saying that they should not make the choice at all, they should ignore the trade-off and maximise profit unless there are legal restraints that impose the other value.

Yes. The trade-off between profit and some other value is the correct area for democratic processes. Of course I believe in freedom of association, so I don’t think anyone should be obliged to work for, invest in, or purchase from a company they really dislike. But I also think that making good ethical decisions about the proper trade-offs between different values is generally a really really hard problem. Yes, you can think of easy cases like “dumping toxic waste in a river”, but there’s a far vaster area of grey cases. How much special privileges do people living by a factory deserve? What’s the right trade-off between safety and enjoying life?

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Tracy W 07.28.08 at 8:16 am

115: John Quiggin: As I said at the end of my post, the argument that corporations should focus on profits, and leave managers or shareholders to pursue charitable goals as individuals doesn’t appear to be valid in general. To be more precise, given perfect competition in credit markets and perfectly efficient capital markets, the argument looks pretty good. Otherwise, and particularly if managers actually have a lot of discretionary power, it seems unlikely to hold up. Maybe somewhere in this thread Tracy has addressed my point, but I haven’t seen it.

I missed something. How does imperfect competition in credit markets, imperfectly efficient capital markets, and managers having discretionary powers make it sensible for managers to both pursue profits and charitable goals?
Also, I have never argued that managers or shareholders should pursue charitable goals as individuals. I belong to several civil, non-profit-making organisations myself.

My objections to having one organisation pursue two or more goals is that:
– it makes it even harder to monitor management performance
– people who agree with the company’s direction towards one goal but think it’s bad at achieving another have harder time expressing their opinions (be that by donations or by buying and selling shares)
– running a profitable business does not mean that management has the skill sets to solve different sorts of problems.

I don’t see how any arguments that credit markets are inefficent, etc, make these issues go away. It’s a bit unfair to expect me to address an argument that you haven’t actually supported in the first place.

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Tracy W 07.28.08 at 8:18 am

Given this apparent fact, isn’t arguing about what managers ought to do a lot like arguing about what the weather ought to be?

No. A manager can, even given all the difficulties in measuring it, try to focus on long-term profit maximisation. Or they can try to focus on something else. Amnesty International does very different things to Microsoft, and they differ in ways that make sense given their different goals.

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Tracy W 07.28.08 at 8:27 am

Tricking people who never needed them into driving trucks (SUV’s = station wagons mounted on truck chassis) is only the simplest and most obvious example of corporate guile and greed leading directly to climate disruption.

The theories that we only want things because companies can brainwash us into them are silly. If advertising was that good, every book would sell as many copies as the Harry Potter series. Every movie would be as popular as The Titanic was. Everyone would be spending their money on books and movies and other items with very low marginal costs of production, which of course are the most profitable to produce en-mass, and have none left over to spend on SUVs.

If you’re going to insist those consumer demands and transactions are naturally arising and no more than an expression of spontaneous material desire you’re egregiously dishonest.
And your foot is hemorrhaging.

Ah, the strawman fallacy. Personally I am capable of complex thought processes, that don’t fall into either/or. For example, I can believe that the idea of a “naturally arising” belief is incoherent, given that humans almost entirely grow up surrounded by cultures. I can simultaneously believe that advertising can work, and also that advertising can only cause run-away successes if it taps into some deep human need. I find this sort of complex theorising useful to explain why not every book is a Harry Potter. Occam’s Razor doesn’t say “chose the simplest theory”, it says “choose the simplest theory that is compatible with the facts”.

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Tracy W 07.28.08 at 8:58 am

Mpowell: But then you also turn around and consistently insist that behaving immorally is not a profit-maximizing behaviour.

In a system of good property rights. The qualification is vital.

Now, regardless of what kind of silly arguments you come up with to show how this is the case, in the real world, companies pursue extremely immoral ends frequently enough that coming up with well-known examples is hardly challenging. So it seems that asking companies to pursue a profit motive alone has proven problematic in many cases.

Your analysis is limited. There are very many non-profit-maximising organisations that have pursued extremely immoral ends. Al-Qaeda is apparently pursuing a political end, as are multiple other terrorist groups. There are many governments that have killed millions with the intent of staying in political power. Communist parties when they have gotten into power have caused massive suffering, despite their intent being to usher in a state of human happiness. The Catholic church let its priests go on molesting children in pursuit of saving face. How many women died of illegal abortions due to anti-abortion laws motivated not by the pursuit of profit but by religious concerns?

To criticise profit-maximising goals without noticing that non-profit-maximising goals are often also bad leads to a wrong understandinf of the world. It implies that if only we could stop those nasty people from pursuing profits, life will be far better as no one will want to do anything bad.

I would argue that we have achieved these substantial levels of wealth in spite of the substantial levels of corruption and unfairness in our economic system.

In our economic system compared to which other economic system? Capitalist countries are less corrupt than non-capitalist countries. If you look at the 2008 Economic Freedom Index as a measure of the level of capitalism, (http://www.heritage.org/Index/), and the 2007 Corruptions Perception Index http://www.transparency.org/policy_research/surveys_indices/cpi/2007, there’s a positive correlation between economic freedom and lack of corruption. The least corrupt country on the list, Denmark, has an economic freedom score of 79.23. The most economically-free country (90.25), Hong Kong, rates 14th on the world when it comes to less corruption. The USA is 20th in the world on the corruption perception index and has an economic freedom rating of 80.56. Go down the scale, and Haiti, 177th in the world in terms of perceptions of corruption, has an economic freedom rating of 48.95.

So, on a relative basis, capitalism as measured by the Hertitage Foundation, is associated with relatively low levels of perception of corruption, as measured by Transparency International.

This of course does not tell us the direction of causation. A relative lack of corruption could cause capitalism, capitalism could cause a relative lack of corruption, or both could be caused by some third factor, or by some even more complicated mess. All we can say confidentally is that in relative terms at least the capitalist countries are the non-corrupt ones.

But I also believe we could do better. The system of ‘good property rights’, is a farce, in my view, b/c of the tight interconnect between lobbying, business law and business practice. For many large corporation, rent-seeking is an important part of your tool box for beating your competitors and extracting more from your customers and suppliers.

Quite possibly we could do better. But just looking at corporations again leads to misunderstanding the problem. It’s not just large corporations that look to rent-seeking – most humans do it. Farmers are notably for their lobbying machines, doctors, lawyers, artists, scientists, religious organisations, even hiking organisations (I belong to a hiking club that in turn makes me a member of the Federated Mountain Club, who determidly lobbies the government to improve tramping facilities, never mind anything else. I really like the club and do also think the FMC does some important stuff about search and rescue and safety in the bush, but the one-eyed attitude of the club’s politics does bother me). It’s the nature of humans to lobby the government for special privileges for themsleves. Whatever we can do to improve the political decision-making process will need to be rather more general than just blaming “big business”.

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Tracy W 07.28.08 at 9:26 am

SGL A lot of this money is invested in the very corporations which are doing damage in the 3rd world where the Foundation works.

And are doing a lot of good in the 3rd world as well. See for example: http://www.fordschool.umich.edu/rsie/workingpapers/Papers476-500/r483.pdf

For example, the Foundation has money invested in chocolate companies which have been sued for using child labour; it has investments in tobacco packaging companies. Yet it funds child health schemes in the 3rd world. Do you get the inefficiency? It’s robbing Peter to pay Paul.

No. Firstly, the vast majority of parents will only send their children to work if the parents have no choice. So banning child labour by multinational companies has the effect of driving kids into other, less-regulated areas. See, for example: “In Bangladesh, for example, a boycott of garments made by child labour caused 50,000 children to loose their jobs. These children then took up even lower paid jobs in other industries, or other demeaning jobs, some even being pushed into prostitution.” http://www.angelfire.com/mi/libertyinstitute/trchlab.html

More generally, do a search on “child labour unintended consequence” or some similar search.

Secondly, smoking causes damage in the long-run. Child health schemes are good in themselves, with or without smoking.

You also seem to have twisted the arguments around so that you are no longer defending what you set out to defend. The whole discussion is about whether corporate leaders should be defended from legal action if they choose to consider more than just the maximisation of profits.

There were to arguments in John Quiggin’s post that I was originally responding to. One was that John Quiggin’s post gave me the impression that the only argument he could see for firms being obliged to maximise profits was that they had a fiduciary obligation. I was making the argument that it was economically efficient in a system with good property rights for a firm to focus on maximising profits.
I was also responding to this argument by John Quiggin:
“And there’s no obvious reason why socially concerned managers couldn’t conclude that the strategy that yielded them the best expected personal value, adjusted for the risk of corporate failure, was one in which the company pursued broad social goals.”

a) their profits would have been much less severely damaged by having their reputation spoiled than by having their product BANNED (which causes 0 sales and would have been the consequence of their not using their considerable lobbying power);

Banning other drugs has not worked out so well that I am eager to apply it to tobacco. If lobbying by tobacco companies has kept tobacco from being banned, and thus reduced the level of violence in society, I’m not too bothered. This is much of a muchness.

b) the damage to their reputation which you suggest occurred (due to their having lied) is nowhere near as great as the damage which they are now suffering due to the actual reputation of their actual product.

How are you measuring the damage caused by the two problems?

This damage is what they tried to put off by lying and lobbying, a legal but immoral activity which you claim maximizes everyone’s welfare.

In a system of good property rights. I don’t know how to change the law to make it so that people only lobby for good stuff, but the problem is far more general than corporations. For example, religious organisations have been known to lobby to make offending them an offence, which is also bad.

Your arguments rely on naive assumptions about a) what corporations do now, and b) what “a system of effective property rights” can actually prevent corporations doing.

This is an interesting line of attack. Personally I am amazed at the commentators on this thread who talk like corporations are the only ones who ever do evil stuff, who never consider that people who are not part of corporations may lobby for bad laws, or may kill people in the pursuit of non-profit-maximising goals, etc. I am also amazed by those people who think that just because someone can run a profit-making corporation they can thereby be expected to tackle any number of other social problems.

I think that that line of analysis, that only looks at the harm done by corporations and by capitalism, and never considers the alternative, is likely to lead to incredibly bad policy design.

They also are increasingly aiming at a skewed version of the original argument, which is simply that corporate leaders shouldn’t be sued for choosing to behave morally.

I fear you and I have desperately different readings of John Quiggin’s post. I think mine, however, is right. For example, in comment 115, John Quiggin said: “As I said at the end of my post, the argument that corporations should focus on profits, and leave managers or shareholders to pursue charitable goals as individuals doesn’t appear to be valid in general. “

I take from this that my original reading was correct, John Quiggin was not making such a narrow argument as you say he was.

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Tracy W 07.28.08 at 10:59 am

Hmm, on thinking about it, I mispoke myself earlier.
Also, I have never argued that managers or shareholders should pursue charitable goals as individuals. I belong to several civil, non-profit-making organisations myself.

I should have more properly said: “It is entirely possible for managers or shareholders to pursue charitable goals as part of a group. I belong to several civil, non-profit-making organisations myself.”

If someone wants to pursue charitable goals as an individual, they should be able to do so. I guess we all do such things as individuals when we do things like drop food round at a neighbour’s who is having a family crisis. Just the formal organisations are more visible and I think my thinking was warped by the availability bias.

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J Thomas 07.28.08 at 12:17 pm

An economy in which one monopoly ran the whole economy would be a communist country. It wouldn’t have the price signals that a market economy relies on as private property wouldn’t exist. The information problem would be overwhelming, and I suspect it would drift the same way communist countries did – into using prices, even artificially determined ones, and separate organisations doing separate things, and a black market.

I have no idea what this has to do with my argument that CO2 emissions are not the direct result of corporate greed, guile, etc.

So, communist countries were countries where the markets didn’t work because of monopoly conditions. When the markets failed to give the best results, the economy drifted into various inefficiencies.

The same things will happen when markets fail for whatever reason. You can only argue that free markets are the only way to go, when free markets actually give the best results.

I missed something. How does imperfect competition in credit markets, imperfectly efficient capital markets, and managers having discretionary powers make it sensible for managers to both pursue profits and charitable goals?

Well, when the markets give you bad results, for example because of imperfect competition, then doing exactly what will maximise your profits is quite likely to give bad results too. Managers can do the right thing then by not responding blindly to the market. This is a stopgap measure — better to improve the market. But individual managers have no power to reform the market, not usually.

So for example, competition doesn’t work well unless there are at least 5 major competitors. But often there aren’t. And when one major competitor fails, the survivors get a price jump, right? Everybody knows they will get more profitable as the competition dwindles away. The closer to monopoly a company can get, the more profitable. If you can buy up the other companies, or pay big bribes to their managements to mismanage them, your company does better.

One of the best ways to maximise profits is to destroy free markets. And the single most effective thing a company can do to increase competition — split the corporation into two independent companies that compete vigorously with each other — hardly ever happens. A manager who did that would badly damage his stock prices and profitability.

So, it’s only in a perfect free market that market signals will always tell you the right thing to do. How do we create perfect markets? We start with a societal agreement about all the evil things that should be discouraged, and what sort of penalties they should get. We might agree, say, that if you litter on the sidewalk you should pay twice the cost of cleaning it up. If you spread toxic waste that makes a stretch of land uninhabitable for 10 years you should pay the owner the maximum value of whatever he might have done with the land. If you spread nuclear waste that makes some land uninhabitable for 10,000 years you should pay the ancestors of the potential owners the maximum value of whatever might be done with that land for the next 10,000 years. If you drive a species extinct, a species that somebody might someday find a use for, something that took 3 million years to evolve, you should pay a lump sum of $2 million. Whatever.

And then armed with our consensus, should we then trust the government to enforce the rules? Surely not. Governments are horribly inefficient at such things. If it’s only a government enforcing the rules then the free market will be inevitably distorted and the market signals will be wrong. We should instead establish a free market in law enforcement. Get a collection of competing free-enterprise police, and pay them money for each criminal they successfully get prosecuted, and charge them for each innocent victim they wrongly charge.

Corporations will be much more careful about environmental laws etc when there are a lot of companies competing to see who can catch them breaking the law, knowing they can get millions of dollars for catching them. Far harder to bribe them, too — you have to bribe every single company that catches you.

Does this seem like a good idea? It logically follows, but I”m beginning to have some nameless doubts.

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Tracy W 07.28.08 at 1:44 pm

So, communist countries were countries where the markets didn’t work because of monopoly conditions. When the markets failed to give the best results, the economy drifted into various inefficiencies.

No. Communist countries were countries where the rulers did their best to destroy markets for ideological reasons. Markets did not fail, instead people were dragged kicking and screaming onto collective farms.

The same things will happen when markets fail for whatever reason. You can only argue that free markets are the only way to go, when free markets actually give the best results.

And of course the habit free-markets have of giving the best results compared to every other economic system I know about is why I argue that free markets are the way to go. For all the problems with markets, every other economic system people have tried has worked worse. The way people criticise capitalism now is to compare it to some perfect ideal, and then think they have contributed something.

Well, when the markets give you bad results, for example because of imperfect competition, then doing exactly what will maximise your profits is quite likely to give bad results too. Managers can do the right thing then by not responding blindly to the market.

This argument is a non-sequitor. My question was “How does imperfect competition in credit markets, imperfectly efficient capital markets, and managers having discretionary powers make it sensible for managers to both pursue profits and charitable goals?” Your argument does not answer that question at all.

So for example, competition doesn’t work well unless there are at least 5 major competitors. But often there aren’t. And when one major competitor fails, the survivors get a price jump, right? Everybody knows they will get more profitable as the competition dwindles away.

And of course, the price jump for the survivors get makes it far more attractive for another competitor to enter the market, or for consumers to find alternative suppliers.

If you can buy up the other companies, or pay big bribes to their managements to mismanage them, your company does better.

And of course if you are doing this, then everyone else has a massive incentive to create more companies for you to buy up or bribe the management of, and eventually you run out of cash.

So, it’s only in a perfect free market that market signals will always tell you the right thing to do.

And in an imperfect free market, market signals will often tell you the right thing to do.

We are never going to have a perfect free market. We are never going to have a perfect economy of any sort. The useful question is “how good can we do?”

And then armed with our consensus, should we then trust the government to enforce the rules? Surely not. Governments are horribly inefficient at such things.

Well firstly, it’s not enough to say that “governments are horribly inefficient at such things”. The useful question is what system could do better.

Secondly, I have run across such arguments as you propose, with competing enforcers, before (I am a bit surprised to hear you advocating such a capto-anarchist position). I have never found them that convincing, and I note you have provided absolutely no evidence that your proposed system will be more efficient than a democratic governments’ efforts (and you have also provided absolutely no evidence that it would be more efficient than any other system of government). There are also several problems I can see with the scheme you outline. For example, who precisely will charge each company for each innocent victim they wrongly charge if we do like you recommend and do away with government?

I suggest that you take your doubts seriously. For all its messiness, the current western economic and government systems mix of capitalism and democracy does do well to pull in immigrants from all around the world. Yes, it could probably be better. But it could be a hell of a lot worse. Going off on ivory-tower schemes like you propose is a very risky approach. I think a far better approach is to look at possible ways of improving our current government.

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J Thomas 07.28.08 at 4:28 pm

“You can only argue that free markets are the only way to go, when free markets actually give the best results.”

And of course the habit free-markets have of giving the best results compared to every other economic system I know about is why I argue that free markets are the way to go. For all the problems with markets, every other economic system people have tried has worked worse.

How many alternatives do we have double-blind comparisons for? You don’ t know what you’re talking about. Nobody knows what economic system would work well. We won’t know until we see one.

“Well, when the markets give you bad results, for example because of imperfect competition, then doing exactly what will maximise your profits is quite likely to give bad results too. Managers can do the right thing then by not responding blindly to the market.”

This argument is a non-sequitor. My question was “How does imperfect competition in credit markets, imperfectly efficient capital markets, and managers having discretionary powers make it sensible for managers to both pursue profits and charitable goals?” Your argument does not answer that question at all.

Oh my. I was giving you the benefit of the doubt as somebody who understood what you were saying and who could follow an argument.

If the market has important imperfections, particularly in credit markets and capital markets, those can lead to errors that get amplified throughout the economy. Read up on chaos theory. So when the market is giving you orders that are obviously in the worst interest of society as a whole (and your company, as a part of that society) you might find your company can help more than you can help by taking your personal profits and donating them to charity, or by building a parallel nonprofit organization to duplicate functions of your for-profit corporation.

Saying that the market will give you the right answers only works when the market gives you the right answers, and on average it probably does not.

Feel free to disagree. You might even be right, in the same way that christians who believe that Jesus will come back and create the Rapture and take the faithful to heaven might be right.

“So for example, competition doesn’t work well unless there are at least 5 major competitors. But often there aren’t. And when one major competitor fails, the survivors get a price jump, right? Everybody knows they will get more profitable as the competition dwindles away.”

And of course, the price jump for the survivors get makes it far more attractive for another competitor to enter the market, or for consumers to find alternative suppliers.

Do it! Let’s make a list of companies that could use some competition, and you go into business and compete with all of them. Let’s see. There’ Microsoft. Cox Communications. Hmm. Home Depot is the closest thing my county has to a hardware store, there are 3 Home Depot branches within 5 miles of my house and nothing else within 10 miles. Come build a hardware store and compete with Home Depot!

Well, that’s a start. I want you to build an operating system and market it, and build a cable network and market that, and build a hardware store so you can take advantage of the wonderful opportunity you get from the lack of competition in all these areas. Or — maybe — you might prefer to buy stock in companies that lack competition instead? Let’s compare advantages. If you build your own cable network, you get to put a whole lot of money into it and you might fail and lose everything. And if you succeed you provide a public service by providing competition, so your profits will not be that high. But if you buy stock in Cox you risk only the price of the stock, and Cox will stay profitable while the competition is lacking. What an awful dilemma, who could choose between those? If you were a manager with a big sum of money to invest, which would maximise your company’s profits?

“And then armed with our consensus, should we then trust the government to enforce the rules? Surely not. Governments are horribly inefficient at such things.”

Well firstly, it’s not enough to say that “governments are horribly inefficient at such things”. The useful question is what system could do better.

No, that isn’t good enough. *Your* system says that corporations should do whatever will maximise profits, and then government should enforce laws to keep them from doing horrible things as side issues while they maximise profits. If government fails to keep corporations from maximising their profits by doing horrible things, then your proposed system fails. You have the responsibility to propose a method to preserve our air, water, soil, groundwater, ozone layer, etc — things that don’t belong to anybody in particular, that could be poisoned on a timescale that far exceeds the lifetime of a single corporation or even a single government. If we can do that with property rights, propose a method. If we can’t decide who owns the ozone layer and how the owner can keep it safe, propose an alternative.

I have run across such arguments as you propose, with competing enforcers, before (I am a bit surprised to hear you advocating such a capto-anarchist position). I have never found them that convincing

Well, it was a try. If free markets are the best way, maybe we need a free market in justice and law enforcement. Only how can we do that? Police who work for the highest bidder? Multiple police forces who compete to investigate each crime, and somebody decides who did the best job? Huh?

You desperately need an alternative, your argument falls apart without it.

Given efficient free markets, and efficient systems to enforce property rights with property fairly distributed and everything important owned by someone who can protect it, we ought to do OK with your approach. But we don’t have efficient free markets, and we don’t have an efficient enforcement system, and lots of important things aren’t even covered by that enforcement system. So there’s no reason to think your approach would work.

The approach we have now is somewhat better. Whenever the system is obviously breaking down, people can choose to take individual initiative and do something about it. That includes corporate managers. Sometimes you do what needs to be done and worry about the details later. This is society’s last-line defense, that sometimes prevents catastrophes when everything else has failed.

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Tracy W 07.28.08 at 4:49 pm

How many alternatives do we have double-blind comparisons for? You don’ t know what you’re talking about. Nobody knows what economic system would work well.

Before we go any further, is there any evidence that could possibly convince you that some economic systems perform better than others? Because if there is nothing that can change your mind, I don’t see any point in arguing with you about it.

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J Thomas 07.28.08 at 8:03 pm

“How many alternatives do we have double-blind comparisons for? You don’ t know what you’re talking about. Nobody knows what economic system would work well.”

Before we go any further, is there any evidence that could possibly convince you that some economic systems perform better than others? Because if there is nothing that can change your mind, I don’t see any point in arguing with you about it.

First off, I’ve seen evidence that some economic systems perform worse than others. I’ve read that there is data showing that plantation slavery was less productive than sharecropping, for example. I haven’t seen the data myself but I’m open to believing it.

I’ve read many claims that soviet systems were particularly ineffective because they tended to rely on top-down control, where administrators decided what their subordinates ought to be able to do and assigned them that, without much feedback about what was actually feasible, and then sometimes they lied about the results. That is, they operated just as many of our own military contractors do, with the same resulting problems.

Many corporations tend to fit the soviet model internally. There’s a difference that they must compete on a market with other corporations like themselves, and the worst of them are unprofitable and are likely to get sold off piece by piece or even closed down.

Corporations are not usually built on a free-market pattern. Employees are usually on fixed salary or fixed wages, and they don’t get a higher price for widgets constructed to a better quality or for a higher quantity produced per hour. The competition among employees for each other’s jobs is subtle.

On a higher level, computer models of economies built as free markets tend to be unstable. They cycle into patterns of extreme booms and busts. There are possible explanations — maybe in reality managers tend to be very conservative and react minimally to market information, and so they moderate the extremes. Maybe managers tend to base their market decisions on the basis of social connections, so they stay with the same suppliers for long times despite the ups and downs of prices. Maybe unknown methods of control have evolved that work better than any of the ideas free-market enthusiasts have invented.

But we’re left with the problem — when you look at the system in detail, free-market theories do not work. They do not work in theory nearly as well as they work in reality. And existing hypotheses about how that happens require that managers for one reason or another ignore price signals except in the long run. Market theory is utterly inadequate to describe what it claims to describe.

To do the job well, you need to actually study alternative economic patterns and look at the data. And this mostly has not been done.

So for example there used to be a lot of speculation that the japanese system was better than the US system. Individual workers were hired for life, and they were paid by seniority. They worked hard because they were japanese and they wanted to excel. They did not spend much effort making themselves irreplaceable, because they had no worry about being fired. An american who had a specialized job hesitated to teach it to anyone else, because when somebody younger who’d work for less could do the work he might be fired and replaced. The japanese system got the skills transferred easily.

But then the japanese fell onto hard times and they started firing people. It turned out that the protection they gave their workers depended on their having stability in their own larger economy, and when that was gone they couldn’t maintain those strengths.

So to decide that one system is better than another, you really ought to study both systems in detail when you see them operating. And it’s important to note that we hardly understand how the american system works.

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John Quiggin 07.29.08 at 4:32 am

The argument about the superior performance of capitalism is usually something of a bait and switch. You first say that capitalism, defined to include the range of economic systems in (say) the OECD outperforms all alternatives. Then you use that to argue either that one specific form of capitalism (the US form) should be preferred or (even more unreasonably) that some pure form of capitalism defined by you should be preferred to the actual successful forms on which you have based your case.

In the present case, the post made the point that Germany (among others) requires firms to consider stakeholder interests. Unless you want to claim that the German economic system is a failure, your argument doesn’t stand up.

(Of course, as JT points out, claims of unique success have been made on behalf of quite a few variants of capitalism over the years, most recently for the US, but none have stood up past the next severe recession in the country concerned).

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Tracy W 07.29.08 at 8:39 am

J Thomas: So to decide that one system is better than another, you really ought to study both systems in detail when you see them operating. And it’s important to note that we hardly understand how the american system works.

So what sort of data when studied in detail would convince you that some economic systems could perform better than others? You raise the issue of time scales – how many years do you want to look at? Do you think that GDP is part of the things we should be looking at? Surveys about satisfaction with life? Gini indexes? Immigration patterns? Do you have some index of environmental quality you like?

The trouble with studying systems in detail is that it generates lots of data, but not necessarily information that can be used to compare two systems as a whole.

John Quiggin: The argument about the superior performance of capitalism is usually something of a bait and switch.

Can we agree on the Index of Economic Freedom as published by the Heritage Foundation (http://www.heritage.org/Index/) as a guideline to what is capitalism?

Then you use that to argue either that one specific form of capitalism (the US form) should be preferred or (even more unreasonably) that some pure form of capitalism defined by you should be preferred to the actual successful forms on which you have based your case.

Can you please tell me the occasions on which I have used either of these two arguments? Please provide references to comment numbers or other specifices. Because I don’t recall making any such argument, and if I did make such an argument I’d like to see what it was precisely so I can avoid it in the future.

In the present case, the post made the point that Germany (among others) requires firms to consider stakeholder interests. Unless you want to claim that the German economic system is a failure, your argument doesn’t stand up.

Germany ranks 23 in the world in terms of economic freedom on that index – its score in terms of levels is 71.2. According to the Heritage guys, its labour freedom rating is low, as is size of government, but it has good protection of property rights, it’s low on corruption, it has a lot of business and trade freedom. (http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP_PPP.pdf).

However, in terms of the UN’s Human Development Index (http://hdr.undp.org/en/statistics/), Germany rates 22 in the world. According the Economist’s Quality of Life Index, Germany rates 26 in the world (http://www.economist.com/media/pdf/QUALITY_OF_LIFE.pdf)
According to the world map of happiness, Germans are about 3oth in the world (if I can count right) in terms of satisfaction with life index. http://www.le.ac.uk/users/aw57/world/sample.html. Germany has an unemployment rate of 8.4% in 2007 according to the OECD (http://stats.oecd.org/wbos/Index.aspx?QueryName=251&QueryType=View&Lang=en), not terrible but it does make it the third highest unemployment rate in the OECD.

Assigning causality is of course difficult. It is possible that if German firms weren’t required to consider stakeholder interests then Germany would be doing far worse compared to other OECD countries. But, it is also possible that if they weren’t required to consider stakeholder interests they would be doing better compared to other OECD countries. You are of course welcome to use the German example to bash anyone who argues that requiring firms to consider stakeholder interests will cause the economy to collapse. But I am afraid that the German example does not convince me that imperfect competition in credit markets, imperfectly efficient capital markets, and managers having discretionary powers makes it sensible for managers to both pursue profits and charitable goals.

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J Thomas 07.29.08 at 5:34 pm

So what sort of data when studied in detail would convince you that some economic systems could perform better than others?

I agree without data that some economic systems could perform better than others. It seems implausible that all would perform the same under all circumstances.

You raise the issue of time scales – how many years do you want to look at?

A century would be enough. Maybe sixty years would be enough. Average out some business cycles at least.

Do you think that GDP is part of the things we should be looking at?

No, GDP measures the wrong things. GDP measures how busy we are buying and selling things we decide have been created. It has some use as a quarter-to-quarter measure, deciding what the governmeny should do to finer-tune the economy’s performance, but it’s useless for comparing different economies.

Incidentally, how does GDP get measured? If I have a share of stock andI sell it to you, that isn’t part of GDP. Nothing has been created, something already existing has been sold. If I create an option and sell it to you, is that part of GDP? A brand new financial instrument has been created and sold, and it will eventually come to fruition and be destroyed. It isn’t exactly a tangible good that’s created but then neither is a piece of software. If I write a piece of software and sell it a million times and you’re the million-and-first, what has been created by that sale? If I sell you the right to log onto my private website, is that GDP? Does it become GDP if I charge you by the minute while you are actually logged on? If we sell each other membership in our websites instead of providing it for free, has GDP gone up?

Surveys about satisfaction with life?

You could look at that, particularly if you can control for culture. Compare north and south korea? Historical data comparing north and south vietnam? I’m afraid there are very few examples where we can control for culture well at all.

We need to consider how trustworthy the data is. Large US companies occasionally wind up with management and their auditors in court for fraud, roughly equivalent to the old soviet practice of shooting managers when it is found that they have systematically forged their production stats. In a good economic system there is no incentive for managers to keep their data secret; many people can find out about mistaken or lying claims. But under capitalism it’s important to keep secrets to keep competitors from using the data. This is a fundamental flaw of capitalism, that a better system would correct — if there was a better system. Unfortunately, with so many secrets and so much lying it’s hard to collect the data that would tell you how well the system is working.

There’s a lot of reason to believe the system does not actually work the way you think it does. So maybe we would do better to look at mathematical models instead. Run computer simulations of economies and look at how well they work and why. We wouldn’t be talking about reality then, but we would be seeing the consequences of our assumptions. That’s better than looking at reality and hoping that our assumptions about it are correct.

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