Adam Smith’s ‘invisible hand’ is poking at corporate activists

Many of America’s largest public corporations recently made a commitment in principle to their “stakeholders,” which included working with their communities and “protect[ing] the environment by embracing sustainable practices.” Leaders of 181 of the 193 member companies of the prominent Business Roundtable promised to “deliver value.”

It gave us a sense of déjà vuFifteen years ago, the head of one of the world’s largest pharmaceutical companies wrote that multinational companies “have a duty to adhere to fundamental values and to support and promote them.” If he had been referring to corporate values such as honesty, innovation, voluntary exchange, and the wisdom of the marketplace, he would have been right. But what he intended was “collaborat[ing] constructively with the U.N. and civil society to define the best way to improve human rights.”

The Business Roundtable commitment sounds to us like more of the same. The extension of human rights and “value for all” are worthy goals, to be sure, but these displays of corporate political correctness bring to mind economist Milton Friedman’s reproachful observation: “Businessmen believe that they are defending free enterprise when they declaim that business is not concerned merely with profit but also with promoting desirable social ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination … and whatever else may be the catchwords of the contemporary crop of reformers.”

Friedman accused such executives of being “unwitting puppets of the intellectual forces that have been undermining the basis of a free society.” That was a half-century ago.

In fact, it is rarely or never in a company’s best interest to shortchange its employees, suppliers, customers, financial creditors, or for that matter its shareholders. It is also rare for companies to fail to actively support their local communities.

The real issue, much as in any deal among parties, is the relative leverage each side possesses in striking the ultimate balance. For example, the rise of unionism was founded on the idea of balancing the leverage of the worker versus the corporation and redressing a long history of workers being shamelessly exploited by companies, governments, and other powerful interests. The movement has been strikingly successful: Even as unions lose influence today, the labor market has progressed to the point where competition for employees usually produces a fair deal for them. Otherwise, why would employees be abandoning their unions in droves?

There is much discussion today of whether corporate profits should be diverted to raise the share of what employees receive above what the free market seems to have settled upon. But that is what free markets are all about — a willing buyer and a willing seller do business when they both believe they got the better of the other, or at least an equitable deal.

The same dynamic applies to suppliers, customers, and communities. To take one example, it is clearly true that some suppliers to Walmart feel price pressure from the chain. But is it reasonable for Walmart to consider arbitrarily diverting profits by driving a less hard bargain with them and then, necessarily, having to increase the prices to their customers? Again, who can set that line? Customers are generally the most liberated party in the stakeholder chain, in the sense that they can usually take their business elsewhere — to Costco or Target, for example.

The focus of the corporate benevolence referred to above seems largely to be external to the corporate ecosystem; that is, it seems to be on humanity at large or some socially disadvantaged group. McDonald’s, the hamburger chain, even ended its popular ”super sized” portions in the name of discouraging obesity; other businesses have adopted less efficient, supposedly more “sustainable” practices without regard to either the actual benefits or their customers’ preferences, such as substituting inferior paper straws for plastic ones, or rejecting “GMOs.”

To be sure, some external influences deserve to be considered and acted on. One obvious case is refusing to utilize suppliers who employ child labor or force workers to toil in unsafe conditions. Another would be to prevent environmental degradation. The challenge is that different parties have wildly differing visions of what is necessary and sufficient. These days it is easy to find cases where highly parochial interests trump what is clearly in the public interest — for instance, blocking an oil or gas pipeline that is statistically much safer than other forms of transportation, or promoting organic agriculture, which is wasteful of water and arable land because its yields are so low.

Businesses do not have social responsibilities; only people do. Inasmuch as corporate leaders work for the owners of the business, their responsibility is to pursue the best interests of their employers — interests that relate primarily to making as much money as possible while conforming to the legal rules and ethical norms of society. It is up to management and the boards of directors (the owners’ representatives) to weigh and make decisions about the competing interests of profit and the external forces exerting pressure. When executives take actions on behalf of the company that they arbitrarily decide are ”socially responsible,” they are commandeering returns to shareholders.

Some businessmen see “corporate social responsibility” as a public relations opportunity to get the activists off their backs. Others naively think that the Holy Grail of successful business management is good public relations. Why else would one of the world’s largest biopharmaceutical companies have spent a small fortune to bring National Public Radio’s “Prairie Home Companion” program to the San Francisco Bay Area?

Other executives support the social responsibility movement because their companies can afford to, and they believe the competition cannot or will not pay the price of admission to the Corporate Social Responsibility club. At every chance, they preen for the press on issues such as climate change, sustainable development, and rain-forest protection. And remember when BP used to remind us incessantly us that it was looking “Beyond Petroleum?”

Neither free enterprise nor the human condition is likely to benefit if companies embrace the do-gooder model. Their actions raise the cost of doing business, lower corporate productivity and reinforce progressive anti-business predilections, while losing sight of their primary responsibilities. And by diverting resources away from productive uses, businesses may hurt many of the very people they claim to want to help. In short, we believe in economist Adam Smith’s “invisible hand,” which describes the unintended but real social benefits of an individual’s self-interested actions.

Henry Miller, a physician and molecular biologist, is a senior fellow at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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