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May 12, 2009

Economist's View - 3 new articles

"Straight Talk about Corporate Social Responsibility"

Nothing here causes me to alter my view that relying upon the goodwill of corporate America as a substitute for government intervention to resolve environmental, foreign aid, and other problems is not going to work:

Straight Talk about Corporate Social Responsibility, by Robert Stavins: Critical thinking about "corporate social responsibility" (CSR) is needed, because there are few topics where discussions feature greater ratios of heat to light. ... Much of what has been written on this question has been both confused and confusing. Advocates, as well as academics, have entangled what ought to be four distinct questions about corporate social responsibility: may they, can they, should they, and do they.

First, may firms sacrifice profits in the social interest - given their fiduciary responsibilities to shareholders? Does management have a fiduciary duty to maximize corporate profits in the interest of shareholders, or can it sacrifice profits by voluntarily exceeding the requirements of environmental law? Einer Elhauge, a professor at Harvard Law School, challenges the conventional wisdom that managers have a simple legal duty to maximize corporate profits. ...

If a company's managers decide, for example, to use "green" inputs, devise cleaner production technologies, or dispose of their waste more safely, courts will not stop them..., no matter how disgruntled shareholders may be at such acts of public charity. The reason is that for all a judge knows, such measures - particularly when they are well publicized - will add to the firm's bottom line in the long run by increasing public goodwill. But this line of argument contradicts the very premise, since it is based upon the notion that the actions are not sacrificing profits, but contributing to them.

This leads directly to the second question. Can firms sacrifice profits in the social interest on a sustainable basis, or will the forces of a competitive market render such efforts transient at best? Paul Portney, Dean of the Eller College of Management at the University of Arizona, notes that for firms that enjoy monopoly positions or produce products for well-defined niche markets, such extra costs can well be passed on to customers. But for the majority of firms in competitive industries - particularly firms that produce commodities - it is difficult or impossible to pass on such voluntarily incurred costs to customers..., suggesting that, in the face of competition, such behavior is not sustainable.

This leads to the third question of CSR: even if firms may carry out such profit-sacrificing activities, and can do so, should they - from society's perspective? Is this likely to lead to an efficient use of social resources? To be more specific, under what conditions are firms' CSR activities likely to be welfare-enhancing? Portney finds that this is most likely to be the case if firms pursuing CSR strategies are doing so because it is good business - that is, profitable. Once again, a positive response violates the premise of the question. But for more costly CSR investments, concern exists about the opportunity costs... Further, in the case of companies that behave strategically with CSR to anticipate and shape future regulations, welfare may be reduced if the result is less stringent standards (that would have been justified).

Finally, do firms behave this way? Do some firms reduce their earnings by voluntarily engaging in environmental stewardship? Forest Reinhardt of the Harvard Business School addresses this question by surveying the performance of a broad cross-section of firms, and finds that only rarely does it pay to be green. That said, situations do exist in which it does pay... - examples such as Patagonia and DuPont stand out - but the empirical evidence does not support broad claims of pervasive opportunities.

So, where does this leave us? May firms engage in CSR, beyond the law? An affirmative though conditional answer seems appropriate. Can firms do so on a sustainable basis? Outside of monopolies and limited niche markets, the answer is probably negative. Should they carry out such beyond-compliance efforts, even when doing so is not profitable? Here - if the alternative is sound and effective government policy - the answer may not be encouraging. And the last question - do firms generally carry out such activities - seems to lead to a negative assessment, at least if we restrict our attention to real cases of "sacrificing profits in the social interest."

But definitive answers to these questions await the results of rigorous, empirical research. ...

"Adam Smith and Web 2.0"

Nicholas Gruen says that while the "collaborative web ... can't be easily explained within economists' standard framework," Adam Smith "would have understood":

Adam Smith and Web 2.0, by Nicholas Gruen: History plays tricks on us. The real internet revolution picked up after the internet bubble had burst. And the economist whose framework helps most in thinking about the internet revolution is none other than Adam Smith, who kicked off economics more than 200 years ago.

The internet boom involved companies using the net to broadcast to customers — like ads on TV — or to automate the sales process: for instance, with customers booking their own airline tickets or ordering books. Today Web 2.0, or collaborative web, is enabling armies of volunteers to build a better world. Some are building and giving away public goods such as open-source software (Linux and Firefox) and reference resources (Wikipedia). Others provide expert analysis and commentary on blogs, often surpassing professional journalists. Others, such as Facebook, connect people with something in common.

These phenomena can't be easily explained within economists' standard framework, in which economic decision-makers are reduced to the ideal type known in the trade as homo economicus. Homo economicus is a pure, calculating egoist optimising his profit or "utility" without regard for others' views or conduct (except where they're useful to his ends).

Homo economicus might not explain which films we see or with whom we socialise. But a theory's job is to highlight some aspects of reality — by leaving out others. When you make investments or haggle for a car or house, you're probably doing the best homo economicus impression you can.

Even here, however, something's seriously wrong. We're socially comparative beings. We care deeply about the conduct, opinions and values of our peers, using comparisons with them to orient our own ideas about what we need or value and how wealthy we want or need to be. As for the subtler aspects of our economy, from the motivation of employees to those amazing things Web 2.0 is bringing forth, well, homo economicus doesn't seem to get close to what's going on.

Enter Adam Smith's Theory of Moral Sentiments, published 250 years ago last month, a book he intended partly as a theoretical foundation for his later economics. As Smith sees it, we begin our lives as blobs of infantile egoism — infans economicus, if you like. But from then on Smith sees the process that we now call socialisation deepening and transforming us.

We learn from our immediate family, on whom we are utterly dependent, that some things win their approval and admiration, others their disapproval and even disgust. Our craving of approval and dread of disapproval and our ability to understand others by imagining ourselves in their shoes draw us into a lifelong dialectical social drama.

In modern economics, the attraction of great power, fame or wealth is simple greed for more. Smith's richer psychology offers a more plausible explanation. "(T)o what purpose is all the toil and bustle of this world?" Smith asks. What human drive lies behind avarice and ambition?

Is it to supply the necessities of nature? The wages of the meanest labourer can supply them. To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease or the pleasure, which interests us.

Smith was an advocate of self-interest in human affairs, but in a much richer, more interesting way than is usually thought. In advocating a larger role for self-interest, Smith identified the public goods that are prerequisites for self-interest becoming socially constructive. Within economics the invisible hand only works in a peaceful, lawful society, and with strong, free competition.

Within society more generally, self-interest becomes a rich ethical meal, not the morally anorectic egoism of homo economicus. Our natural sociality enriches and educates our self-interest. Craving esteem and imagining ourselves as others see us, we gain some objective appreciation of our own moral worth. And this is ultimately a spur towards virtue as we strive to be worthy of the esteem we crave (although, of course, as we are mere mortals there is much stumbling on our journey).

Web 2.0 is scaling up the scope for human sociality and opening up new vistas for the expression of self-interest. And yet profit-seeking is only a small part of how that self-interest is manifesting itself.

The way we express our self-interest on Web 2.0 is something new, and also as old as humanity itself. Why do millions of us blog? For the same reason we talk and write emails, text messages, instant messages and letters (remember them?). We do it to communicate feelings, ideas, needs and experiences with others who might understand us. They might even write back! Whether it's the evolution of language itself or the evolution of culture and social mores, people's interaction like this builds communities of shared meaning and understanding.

Even Smith's description of a market was inherently social — he toyed with the idea that the fundamental human drive behind bargaining was the desire we each have to persuade others to see it our way. Smith would have understood the foundational proposition of an early Web 2.0 credo, "the cluetrain manifesto" — "Markets are conversations".

As Web 2.0 burgeons, its denizens pursue their interests like the merchants in Smith's Wealth of Nations, posting and commenting on blogs, making and exchanging programming code and mash-ups of each other's content, making connections based on social or practical needs. Some serve practical needs — perhaps they need some software bug fixed. Others are "know-alls" proving their superior knowledge. Some express their love of a subject.

And just as the miracle of a healthy market enables the merchant's self-interest to serve the common good, so this new alchemy of the web aggregates individual efforts into freely available public goods. Likewise this unruly mix of motives gives us glimpses of our better selves. To use Smith's description of the psychology of ambition, it lures us on our quest for an "easy empire over the affections of mankind", which is a hint, a tease calling us on a quest for a more distant and difficult destination — virtue itself.

links for 2009-05-12

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