Posts Tagged ‘greed’

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.”

What Money Can’t Buy?

August 22, 2012

Scandals everywhere. All about money (or sex, as in Penn State; or was that really about money too?). Is money the root of all evil?

 In truth it was one of our greatest inventions. Barter works fine if each party has something the other wants. Otherwise, it’s far handier if you can sell your stuff for cash you can use to buy anything. This enabled the division of labor, with people specializing in professions – one of civilization’s killer apps.

I’ve written before about greed. It may seem puzzling that a billionaire wants even more – how many mansions and yachts can one use? But that’s not the point. It’s the playing of the game; money is the scorecard. And wealth confers power and status, which humans are biologically programmed by evolution to crave – especially males, to attract more mating opportunities. (Aristotle Onassis said that if women did not exist, all the money in the world would be meaningless.)

The recent supposed “crisis” of capitalism has intensified concern with issues of money –inequality and greed. The cliché is that money can’t buy happiness. Tell that to the world’s billion or so still subsisting (or not) on less than a dollar a day. In fact, money buys a lot of things that make life more pleasant. And longer.

But, beyond a certain point, does it confer greater happiness? Some studies say no. This partly reflects what Barry Schwartz, in The Paradox of Choice, called the “Adaptation Effect.” You adapt psychologically to whatever socio-economic niche you happen to occupy, which you now expect to occupy; and anything merely expected gives no special satisfaction. Win the lottery and you’ll soon adapt to that higher niche. You may not feel happier; yet your quality of life has improved in a thousand ways. Does that not count for anything? Rather, for the world as a whole, surely it’s good if more people can afford better living.

True, pursuit of money for its own sake, rather than for what it buys, may actually degrade quality of life by detracting from pursuit of other desiderata (friendship, love, wisdom, etc.). Yet chasing wealth, for whatever reasons, is the chief motivating factor for all the efforts ever made to improve our lives. Until every human has such a good existence that no further gain is feasible, we should not denigrate the moneygrubbing that fuels such improvement.

In How Much is Enough? Money and the Good Life, Robert and Edward Skidelsky invoke a 1930 Keynes essay foreseeing increased future productivity so people need work only 15 hours a week to maintain their standard of living. We’ve gotten the higher productivity, but don’t work less. The Skidelskys wonder why people don’t claim all that added leisure time. Well, maybe they’re not satisfied to “maintain” a 1930 living standard! We do value leisure, but are motivated to work to afford better leisure activities. Besides, most people’s sense of identity is in their work, not their leisure. They don’t want to be like the useless, frivolous Eloi in H.G. Wells’s The Time Machine.

Then comes philosopher Michael Sandel’s book, What Money Can’t Buy: The Moral Limits of Markets.* (It ought to be What Money Shouldn’t Buy.) Sandel decries a world where it seems everything is for sale; he doesn’t want poor people selling kidneys to rich ones, for example. Many would indeed see an “ick” factor here.

 But that ignores the fundamental logic, and virtue, of all free market transactions: people buy and sell to each other only when it makes both better off. You can argue that the impoverished kidney seller is not really a free agent in the transaction because his poverty leaves him little choice. Perhaps so. But this is condescending elitism of the worst sort.

Nobody is ever totally free; everything we do or choose is constrained by a myriad of factors – economic, social, cultural, psychological, physical. Poverty is just one such constraint. Still we try to do what improves our circumstances. Thus the kidney peddler may be constrained by dire poverty, but given that reality, he judges that selling the kidney will improve his situation. He needs the money more than the kidney. Where does philosopher Sandel get off telling him he shouldn’t be allowed to make that choice for himself? And what about the other guy who may die if he can’t buy the kidney? Do Sandel’s moral scruples leave either of them better off? No, they do not.

In fairness, Sandel effectively argues that allowing such sales is bad for society; and that’s a legitimate concern. Certainly society may limit freedoms that harm third parties. But are kidney sales anybody’s business but the buyer and seller? Well, you might argue that a society permitting this is in some sense a worse society for everyone. That selling kidneys for money somehow uglifies society, or somehow degrades human life, etc.; again, the gut’s “ick” response. But these are all subjective judgments with no basis other than feeling. Not good enough.

To feel there’s something inherently grubby about selling anything for money is an irrational prejudice. The existence and use of money is a good thing, not bad. Ability to buy and sell things makes people more free. That’s why it’s called a free market. It means having more opportunities to engage in exchanges that make people better off – and kidney sales are in fact a perfect example. Anything that hinders such transactions makes people worse off. If you disallow kidney sales, the seller can’t ameliorate his poverty, and the other fellow will die (the ultimate in being worse off).

Sandel has forgotten what may be the first principle of moral philosophy: whether something is good or bad depends on how it affects the well-being of creatures capable of feeling. The parties to the kidney sale strike a deal because it improves well-being for both. It may put Sandel’s sensitive moral nose out of joint; but I don’t see how his personal feelings come into the matter at all.

*Confession: I have only read reviews, but I did read Sandel’s book Justice making similar arguments.