The Things Business Gets Wrong
Not Markets, Business
Having posted bad arguments against the free market and receiving slight pushback with some confusion between business (things within markets) and free markets themselves, allow me to criticize business some.
Before I get to the cases where business goes awry, I want to be clear that business and especially big business is a critical, essential part of markets. In fact I join Bryan Caplan and Tyler Cowen in their love and appreciation of business including how both recognize that business is severely underappreciated (here is Caplan making his case in a short blog post).
To be fair in this criticism and with a nod to the pushback, I must admit that the market as we see it in the wild has allowed businesses to run afoul.
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An undesirable engagement with philanthropy. This is largely a principal-agent problem resulting in a misappropriation of shareholder funds. The principal-agent will be an ongoing theme here.
The fundamental role of business is to use resources make profits. Of course, nobody said it better than Milton Friedman. When businesses engage in philanthropy, they substitute the desires of those in the business (agents) for those of the business owners (principals).
Often these gifts are not actually gifts, they are profit-enhancing activities under the guise of giving. I’m sure there are examples somewhere of businesses giving to charity anonymously, but these are vanishingly rare. That should give you a hint about what is really going on.
In those cases I see no problem. It is when gifts are true gifts that we have a problem.
Steering government activity, especially spending, to ends that benefit them rather than society. This is a mirror image of the above; so I see how it could be confusing. Didn’t I just make the case that business should use its resources in ways that benefit the business? Yes, and this isn’t that.
The key difference is now we are talking about public resources rather than a business’s own resources. This is leveraging business’ sizable influence to change policy. It happens at the national level, but it is also seen meaningfully at the local level.
At the national level it is most egregious with examples including lobbying if not explicitly changing the rules in favor of the incumbent business (banking, insurance, pharmaceuticals, manufacturing, etc.) and other examples of regulatory capture at work.
At the local level it is also problematic even though it can be beneficial to society—largely by accident despite the rhetoric made in its favor. This includes chamber of commerce activities that ask for public amenities that enhance the local market making it more attractive for the employer via improvements for the employee and customers. Not always bad, as I have said. But it easily goes to extremes from parks to government school funding.
It is at its worst with licensure and permitting. CON laws are maybe the worst of the worst.
Exploiting natural monopoly power. Monopolies are bad because they restrict output. NOT because they make more profit than the “normal” level. That is a byproduct. In fact monopolies do not make enough money.
The problem exists where economies of scale imply that only one or a few firms can profitably exist in a part of the market. This creates frictions because of transactions cost leading to the inefficiency of too little production and eventually too little innovation due to lack of competition. But do realize these are temporary phenomena.
It is true that the word “temporary” here is doing a lot of work. These conditions can last decades. While I do allow for the case to be made that government corrections are at least possible, they may be neither necessary nor desirable. The real solution would start with not allowing the regulatory capture that so naturally flows from the position these firms find themselves in.
The problem remains: All to often they leverage their position as a regulated firm (many times but not exclusively a utility) to thwart rivals and lock in above-normal profits while restricting supply—the very thing the regulation was meant to address.
Business ignoring its role as a responsible citizen with significant power. As Abraham Singer explains on The Curious Task Podcast, “Business ethics matters, and business ethics is extremely complicated.”
At times business simply takes the easy way out by being “neutral”. But there is no neutral. Choosing to abstain is still a choice.
So, I’m not letting business off the hook here despite my criticisms in items above. Unfortunately, there are many bad examples of when it does take a position. This includes acquiescing to policies against society’s best interest (socially unethical) as well as those that are likely not beneficial to the business itself (back to the problem of shareholder interest).
In a more active role we find business bending the knee to popular but wrong positions. Wokeness is the most recent and perhaps best example. Companies tend to take the most draconian version in reaction to any social movement. I am sympathetic to the dilemma faced. It is hard to stand against the tide, and no single company should shoulder the burden of being King Cnut. Regardless of the challenge, business has great resources and power. With that comes responsibility.
Doing the bare minimum. This one is getting better every day. The recent acceleration is due to social pressure that pushes against the prior complaint above. I cannot emphasize enough how nuanced it is—such a fine line between helpful and destructive.
I will have a future post denouncing ESG. This will be centered mostly on how it really works as opposed to condemning the intentions. To be sure, the intentions are not always good either. Still, the intentions in most cases are well-meaning albeit often shallow.
Just because you can doesn’t mean you should. As CFA ethics consistently stipulate, the legal limit is not necessarily the ethical limit one must adhere to. Pollution comes to mind. Firms that legally polluted in the past in a way that is no longer legal were generally exploiting a lack of property rights as well as a disregard for long-term, best-for-all-concerned goals. The tragedy of the commons is a reality. That does not justify bringing it about.
To be sure, these are generally problems that are a function of incomplete, less-than-free free markets. Most of them are directly related to too much government (too powerful and too big). Some are just inefficiencies that will be worked out as markets are allowed to deepen and develop. Beware: Not all market failures leave room for political solutions. Often the cure is worse than the disease.
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