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 }
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.
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.
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.
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.
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.
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.
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.
“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.
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.
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.
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?
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.
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?
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).
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.
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?
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.
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.
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.
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?
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.
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.
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)?
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.
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.
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.
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
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.
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.
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.
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?
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?
“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.
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.”
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:
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.
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?
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.
Ah, but geo, then we would not have a moral stick to beat the perfidious Europeans with, and where would we be then?
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.
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.
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.
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…
After pausing for thought, I went on Google and immediately found: http://angrybear.blogspot.com/2006/12/liberals-conservatives-charity-and.html.
… and this: http://www.volokh.com/posts/1164012942.shtml
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.
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
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.
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.
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.
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.
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.’
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.
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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
This Agreement explains our obligations to you, and your obligations to us relative to the Network Solutions service(s) you purchase. Manager Relationship
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.
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 kno