Posts Tagged ‘capitalism’

What Is a Business For? Is Profit a Dirty Word?

July 15, 2015

UnknownAt a recent social event, most guests sanctimoniously agreed it was somehow disgusting that anyone should make a profit providing health care. One woman said she had no problem with a store profiting from selling sweaters; but no one should profit from people’s hardship or suffering. I frankly thought that bizarre. Isn’t the relief of suffering a greater boon, more worthy of compensation, and incentivizing, than merely supplying sweaters? I sure as heck didn’t begrudge the profit of the dentist who cured my tooth ache; that’s what motivates people to go to dental school, invest in offices and equipment, hire staff, etc., to provide such service. Nor do I resent the profits of the pharmaceutical company producing the medicine that makes my wife’s life livable.

Unknown-1Calvin Coolidge said, “The business of America is business.” But what is a business for? There are two schools of thought. One says a business’s only purpose is to make money for shareholders (the owners) and anything detracting from that is indeed a dereliction of its primary duty. The other side says a business should serve the interests of all “stakeholders” affected by its doings – including employees, customers, and the broader public. They note that in olden times a business seeking a corporate charter from the state (allowing limited liability for shareholders) was required in exchange to have a public benefit purpose. But that model was dropped in the 19th century in Britain and America, allowing corporations to be chartered just to do business.

Thus critics of capitalism talk as though the first side won the argument and businesses do exist solely for profit – in disregard of any other consideration – and hence are ipso facto a menace. For example, Naomi Klein, whose recent book I reviewed, seemingly thinks profit is the sole reason energy companies extract fossil fuels – the fact that society uses, needs, fossil fuels doesn’t enter into it. As if, remove the profits, and no extraction would occur.

imagesThis tells us there’s something incomplete in the view of businesses as solely profit maximizing creatures. It leaves out the way they do that – by supplying something beneficial to customers*, creating value greater than what is paid (of course some predatory businesses do the opposite, but that’s cheating). The point is epitomized by Steve Jobs. He made tons of money, but that wasn’t his ultimate objective – rather, the profits were what enabled him to perfect products useful to purchasers. That was his true motivation.

People who bought his products valued them more than the money spent. That difference, or surplus value, created by Jobs, increased societal wealth. Had he never existed, all those people would have been worse off. His wealth would not have been somehow distributed among them; it would never have existed either. This is what the 99%-vs.-1% mentality misses.

Today it’s more true than ever that business is really all about customer value, with the internet leveling the competitive playing field, giving consumers far more choices and access to information. A business whose products aren’t great, that doesn’t satisfy customers, will not survive.

Anyhow, it’s too simplistic to say (legitimate) businesses are only concerned with profit. The real world isn’t like that. It’s certainly untrue to say they care only about shareholder returns. Shareholder ownership is merely notional; in reality a corporation owns itself, buying shares merely entitles one to certain rights, while management isn’t meaningfully beholden or accountable to shareholders, instead running the company for its own purposes. And while a firm’s profitability does benefit managers, mainly they care about profits because profits advance their other agendas (a la Steve Jobs).

Unknown-2Also, speaking of the real world, corporate denizens are human beings, and while money is surely a big motivator, nobody is exclusively mercenary. Another big motivator is how one appears to other people – and in the mirror. Most of us want to be seen as doing good, and even to actually do it. Back in the ‘70s I was a regulatory lawyer battling Con Edison over its rates. The company was in financial trouble; and I actually felt management was betraying shareholder interests to bend over backward for consumers.

images-2Corporate greed? It’s not so simple.

At the end of the day, the most successful and profitable businesses are those that are best at creating customer value – which of course means societal value. Adam Smith wrote of the market’s “invisible hand” thusly benefiting society. I heard a radio commentator say Smith might have been right in his simpler time (1700s) but not in today’s world rife with inequality. Really? In Smith’s day, the great mass of humanity everywhere lived in squalid poverty – whereas in the last century, worldwide average real dollar incomes quintupled. That colossal fact is not negated by the inequality of the few with great wealth. They haven’t stopped billions of people from seeing a quantum leap in living standards in modern times. And that vast enrichment is nothing other than the cumulation of customer value created by businesses seeking to profit thereby – i.e., free market capitalism. A stunning vindication of Adam Smith and his invisible hand.images-1

* To quote management guru Peter Drucker, “There is only one valid definition of a business purpose: to create a customer.”

Poverty and Inequality: The Business Cure

January 7, 2014

imagesPoverty has long been a cause celebre; inequality seems the cause du jour. The oceans of ink spilled on these topics are mostly finger-pointing, short on solutions, and the solutions are too often worse than useless. But three pieces in a recent issue of The Economist stood apart.

The “Schumpeter” business column, headed Not open for business, concerns why U.S. employment lags despite massive government stimulus. What government gives with one hand it smothers with the other. Start-up companies account for all of America’s net job creation,* and government is stifling them.

First, they’re starved for human capital. Our native students don’t acquire enough of the right skills; and when foreigners do, “the authorities do their best to drive them out of the country once they have been educated or to break their spirits on the visa treadmill.” Legions of foreigners who want to work here or start businesses wind up going elsewhere due to our suicidally restrictive immigration policy.

UnknownSecondly, there’s over-regulation. In 2009-11, Schumpeter relates, 106 new regulations were issued with projected annual economic impacts exceeding $100 million each. I’ve written about how legislation like Sarbanes-Oxley and Dodd-Frank imposes vast new bureaucratic requirements. Giant established companies, with armies of lawyers, can cope, but not small and starting firms. The dramatic decline since 2001 in new companies going public is no coincidence.

This is part of government’s war on business. You’d think, given the parlous state of U.S. employment, there’d be a cease-fire. And (notwithstanding all the anti-business rhetoric of “progressives”) neither the public nor the government actually wants this war. images-2Yet it goes on, because too few seem to grasp that for good jobs paying good wages you need good businesses earning good profits. Here in New York politicians like Gov. Cuomo talking “economic development” seem oblivious to the war. Recently the state sued a host of smaller firms because a workers compensation trust into which they’d long faithfully paid can no longer meet employee claims; many face being driven out of business.

If you want to redistribute wealth, first you’ve got to create wealth to redistribute.

Next there’s a book review – The Great Escape: Health, Wealth, and the Origins of Inequality by Angus Deaton. In a nutshell, much of the hand-wringing over supposed rising inequality overlooks non-money factors, most notably health and longevity, where the gap between rich and poor has been narrowing significantly. Deaton does recognize the billion or so in poor countries still excluded from this trend. Should we give money to help them? His answer is basically no; while some targeted health programs are effective, most foreign aid does more harm than good because the key problem is not lack of resources but bad governance. And aid tends to keep bad governments bad.

Unknown-1Which brings us to another book review: of Paul Polak’s and Mal Warwick’s The Business Solution to Poverty. You read that right: capitalism, which so many (so wrongly) blame for poverty is really the solution. Rather than seeing the poor as victims needing handouts, the authors see them as potential workers and customers.

They write mainly about the latter role, and how products and services can be targeted to the needs of poor people, which if done right not only generates profits but also improves life for the purchasers. We see, yet again, the error of viewing business as merely exploitive. What business is instead really all about is profiting by satisfying others’ needs and wants.

Unknown-2And, more broadly, again it is capitalism, business, industry, commerce, enterprise, that is the answer to poverty: not people given money but earning it. Rich countries, and rich people, in the main, are rich because they produce things that better the lives of others. That’s how the whole world gets richer.

* I.e., among other employers, job gains and losses cancel out.

Modi for India

December 27, 2013

imagesI have a mental “Wall of Shame” with pictures of the world’s baddies (and relish X-ing out the face of any who (like Qaddafi) goes down). In 2002, Narendra Modi earned a spot on that wall.

That was the year of a veritable pogrom by (majority) Hindus against (minority) Muslims in the Indian state of Gujarat. It was horrible; a thousand or more died. The state’s recently elected leader was Modi, of the BJP, a Hindu nationalist political party.

Narendra Modi

Narendra Modi

It would be too much to call him responsible for the atrocities – but only just. He was certainly responsible for doing way too little (almost nothing) to stop them. And ever since, he’s refused to express any remorse over what happened.

Now Narendra Modi is the BJP’s candidate for India’s prime minister.

India, since 2004, and for most of the time since independence, has been run by the Congress Party; and the party has been run by the Gandhi family dynasty (no relation to the Mahatma; it’s Nehru’s descendants).

Manmohan Singh

Manmohan Singh

The current party chief is Sonia Gandhi, the Italian-born widow of the assassinated Rajiv; she sensibly passed up the prime minister’s post in favor of Manmohan Singh, a well-intentioned technocrat who had played a big role in India’s early 1990s economic reforms. Previously India had been mired in stultifying socialism, “the license raj,” and the consequent “Hindu rate of growth” (i.e., very little growth at all).

That had kept India as the poster country for squalid poverty – a country where most people didn’t even have toilets and went in the streets. images-1Half still do. But the mentioned reforms undid socialism’s worst effects, boosted economic growth, and began lifting millions out of poverty.

It’s true, and inevitable, that the progress has been very uneven, great numbers remain in deprivation, and inequality may even have increased as more have grown rich. But the country as a whole is richer, the middle class is expanding, and poverty numbers have been shrinking. It’s simply due to a freer economy. Lefties hating market economics will try to insist India’s poverty has worsened. That’s nonsense.

I heard anti-capitalist crusader Arundhati Roy indict a litany of alleged evils of free market economics in India. I kept thinking: she’s missing it completely. Nothing she denounced is actually free market economics; to the contrary, it’s non-free market economics, it’s India’s culture of cronyism, corruption, and over-regulation that stifles competition and economic opportunity; it’s government perverting the free market. Unknown-2So fixated was Roy on demonizing “capitalism” that she couldn’t see this Indian elephant in the room.

Which, despite the 1990s reforms, is still there. India’s growth has been slipping back down toward the “Hindu” rate. Desperately needed is another round of reform, to attack the true problems behind Ms. Roy’s indictment, and further open up the economy. But the 81-year-old Singh and his Congress party government seem to have completely run out of steam, paralyzed by inertia and populist political pandering, as well as cronyism and corruption.

Unknown-3Waiting in the party’s bullpen is the next Gandhi scion, Sonia’s son Rahul – a nothingburger who nobody, not even he, can imagine leading a nation of a billion people. India has had enough of the Gandhis and their Congress party.

Which brings us back to Narendra Modi. Who, in contrast to the Gandhis, is a self-made man from low-caste antecedents. And who has done in Gujarat what so desperately needs doing for all India: he’s curbed corruption, run the state effectively, opened up its economy, slashed stifling regulation, and attracted investment. Unlike typical Indian politicians, Modi eschews all language of wealth redistribution, talking instead of wealth creation. And it hasn’t been just talk. Under Modi, Gujarat’s economic growth and improvement, and consequent poverty reduction, have greatly outpaced the rest of India’s.

Yet Modi continues unrepentant about the 2002 riots, and his BJP remains a Hindu supremacy party. Bad stuff; though Modi has softened his Hinduist rhetoric, now insisting leaders must be secular, and that economic development trumps religious factionalism. And if he won’t apologize to Muslims, he seeks to change the subject: “I want to ask poor Muslim brothers whether they want to quarrel with poor Hindus or fight against poverty. I want to ask poor Hindus whether their concern is disputes with poor Muslims or the fight against poverty. . . Let’s defeat poverty together.”images-3

We do not live in Heaven where perfection reigns. Human life is messily imperfect and often presents us with problematic choices. But choose we must. India should vote for its future, not its past, and choose Modi.

Belief in Economics

October 26, 2013

UnknownEconomics has been called “the dismal science.” And calling it a “science” at all is arguable. Yet to me it’s the essence of understanding how the world works. As author Tim Harford puts it, economics is really about how people live.

I discovered his book, The Undercover Economist, at a used book sale. It proved a nice surprise.

A key theme is scarcity power. Economic power comes from control of something people need or want. The book starts with an illustration: a coffee kiosk at a busy train station. Coffee is not fundamentally a scarce commodity but, in that location, rushing commuters have no other source for their fix. Unknown-1That gives the kiosk scarcity power; so its prices are steep, and it does a roaring business.

You’d think that means high profits. Not so! The kiosk ekes out only a small profit. How can that be? Well, there’s a supervening scarcity power: the rail authority controlling the space. Vendors must bid for it, so it goes to the one willing to accept the smallest profit after paying the highest rent. So most of the profits from those high priced coffees actually go to the rail authority.

Scarcity power is one way in which markets can be less than perfect. In a perfect market, sellers compete freely, which drives prices down close to costs, minimizing profits and maximizing what economists call “consumer surplus” – the additional amount buyers would have been willing to pay if they had to. imagesCapitalism’s critics love to scoff that this “perfect market” picture is a fantasy. But in fact, many markets do approximate it. A major example is the airline industry, which generates little profit and hence much consumer surplus.

But meantime, a huge cause of markets being less than perfect is government intervention. Government can create scarcity power in many ways – such as protectionist restrictions on imports, or onerous licensing requirements for trades like hairdressers – as if it’s important to protect consumers from bad haircuts. images-1It’s actually existing hair salons that are protected, from competition by upstarts. And of course businesses use political power, and what amounts to bribery, to get such government thumbs on the scales.

But despite all that, don’t forget that no one is really forced to buy anything. Most goods have substitutes, which limits scarcity power. And buyers buy only when they value the purchase more than the money paid (or more than whatever they could buy instead). This leads to Harford’s second key theme – the world of truth. When pricing and purchase decisions are made in a free market, that creates information about what things are really worth; and that, in turn, dictates what is produced, how it’s distributed, and how resources get utilized. The result is economic efficiency, meaning nobody can be made better off without someone else made worse off to an equal or greater degree. Thus, an optimization of aggregate economic welfare.

images-3Having written in 2006, Harford could not directly answer another critique that has since become quite fashionable: debunking the idea of “homo economicus” making choices based on rational calculation of self-interest. Such rationality is another fantasy, we’re told – consumer decisions are subject to a host of weird biases — so market economics supposedly rests on a faulty premise. Yet the answer to this is clear from Harford’s analysis. The point is that people’s money is valuable to them, if only because of all the alternative ways they could spend it. And even if sometimes (or often) individual spending choices might seem irrational, it’s absurd to deny the rationality of purchases in the aggregate. Whatever might be said of a single $4 coffee buy, thousands of them tell us something indisputably true about how coffee is valued in relation to the myriad alternatives – again, “the world of truth” that market economics incorporates.

And, indeed, that’s the only way we can talk about value at all. “Value” has no meaning except insofar as people make choices among alternatives. Any other system for assigning value (like wage and price controls) is bound to be arbitrary and to result in less economic efficiency than people making choices in spending their own money. The market’s truth is the prime means for making the greatest number better off and fewer worse off.Unknown-2

I’m not an economist. But I don’t see economics as a body of abstruse knowledge; it comes down to logic and common sense. However, many people, who say they believe in science, don’t seem to believe in economics (at least not when it gets in the way of policies they favor).

Giddy Up

July 20, 2013

That’s the name of a new local bus company, profiled in our paper’s business section. Not the kind of story I’d normally read, but it was a lazy day. And this gave me an emotional lift!

The Saratoga race track is around an hour from Albany; and of course parking is a hassle. Comes young Tracy Cornwell wondering, “why isn’t there a better way?” You might think some bus company would be running shuttles. But no. So Cornwell decided to.

Photo by John Carl D'Annibale, Times-Union

Photo by John Carl D’Annibale, Times-Union

She’s a college grad who spent two years working on cruise ships. Her venture into the bus business was no mere lark. Cornwell raised $25,000 to $30,000 in start-up capital, attended a ten-week “entrepreneur boot camp,” researched her market carefully, made deals with some hotels as pick-up points, bought a bus and refurbished it to be a festive “party bus,” and hired drivers. Ticket prices are a down-to-earth $10 each way.

While reading, I was (as often) asking myself, “can she actually make money?” at that price point – considering all the investment, running costs, wages, insurance, promotion, etc. But Cornwell does seem to have scoped out her business plan intelligently. Her bus is mostly running full.

We keep hearing how bad the economy is, how tough for young graduates. So it’s great to read about a young gal who seems to have all the old fashioned virtues, a go-get-‘em entrepreneurial spirit, and to be headed for success.

I’m sooo sick of hearing “capitalism” and the market economy badmouthed. Tracy Cornwell epitomizes what it’s truly all about: improving people’s lives. Cornwell saw a way to provide a service people would want. If she can make a profit providing it, that’s great, because otherwise would it be provided? Profit is not a dirty word.*

Tracy Cornwell: my tip of the hat to you. May you have all the success in the world.

(Click here for Giddy Up’s website.)

images* I recently met a women who was all against capitalism; she favored instead a barter economy. I wanted to ask her, how did you get to this party? By car perchance? Do you think a barter economy could produce cars? But I held my tongue and smiled. (Well, possibly I rolled my eyes.)