Part 2 of a Discussion of Peter Foster’s Why We Bite the Invisible Hand Chapter 15 “Global Salvationism”
Foster is flipping a popular narrative about the problem of big business on its head in this part of the chapter. Such fears have led to calls for Corporate Social Responsibility (CSR), but it is all based on a misunderstanding of how businesses function.
CSR asserts business need to do more than focus on profits. They want to correct capitalism to focus on stakeholders rather than shareholders.
Economist Milton Friedman believed the role of business was of course to make profits for their shareholders, but he meant doing so within the system. That is, you do not seek profits at any cost but instead you have to abide by the legal and ethical rules of society. I’ve discussed his thoughts, and how they have been misconstrued, in an earlier blog.
Capitalism does not need CSR to fix it. Businesses already have to be concerned with following environmental regulations, adhering to labor laws, and appearing to be good corporate citizens by their customers.
One common concern is that big business will use its wealth to corrupt government power for its own ends.
Foster is not saying it does not happen; he is saying that is not quite how the story goes.
First, he questions the assumption inherent in that story, wealth is power. Adam Smith addressed just this claim because it had been advanced many years before by Thomas Hobbes. (p. 368)
While Smith knew wealth could be used to purchase political power, he was simply noting that it is not synonymous with power. (p. 368) Wealth was definitely purchasing power, just not necessarily political power.
Smith noted the root of the problem is the existence of the powerful state, not the existence of wealthy businesses. It is only with a powerful state that a wealthy business could have the option to corrupt markets. Without such an option, the business has to earn money by serving its customers. (p. 369)
States had coercive power. Corporations had purchasing power. The two were quite different, although the state relentlessly sought to coerce or co-opt the corporate wealth-generating ability to its own ends. (p. 370)
The State will uses its powers to help businesses at the expense of others because it will lead to increased tax revenues, state power, and/or donations to politicians. When this occurs, big business is blamed as the root cause and somehow government escapes blame.
One sneaky example of this is when some chains promote that they have adopted a higher minimum wage as a way to appeal to their customers. If they then also support legislation making wages higher for all, and that just so happens to make it harder for smaller businesses to compete…well, that is simply a nice side bonus.
Another example is the ban on incandescent lightbulbs. The push was not actually from environmentalists but from the manufacturers who preferred the higher profit LEDs to the incandescent bulbs consumers preferred.
Another source of fear of big business stems from what Foster terms as a misunderstanding of the market that leads to anti-capitalist beliefs. He has discussed some of these widely held beliefs in an earlier chapter.
Misunderstanding of the market as a power struggle inevitably led people to assume that “big” would always drive out “small”…Insofar as big business ever did “drive out” small, it was because “big” offered something that consumers preferred. It was, for example, not supermarkets or big-box stores that put butchers…bakeries or mom-and-pop stores out of business; it was the voluntary migration of the stores’ customers…Specialist butchers, bakeries, and craft breweries were able to make a comeback as they appealed to consumers’ desire for novelty and variety. (p. 372)
I think this raises some interesting points for discussing our economy today.
We do hear people complain about the loss of small businesses due to the big chains, but the reason it happened is the market system is about the allocation of our scarce resources.
The larger size, or scale, allowed economies of scale to provide more products for cheaper. Our buying habits revealed that this is exactly what we want and ultimately it contributed to a higher standard of living.
Instead of looking at how much more people could afford, especially those at the lower end of the income, the focus was on what was lost. Anytime there is a reallocation of our resources, there are winners and losers.
But Foster goes on in his scenario to note the rise of a different kind of small business. So it is not that all small business is gone from the system. It is that for small business to exist, it needs to provide something big business cannot. Competing on price is not the area for them, but competing on quality, specialness, or service is.
There is a lot of classism in the critique as well. The Walmarts of the world are looked down on as people ridicule its customers. And the shoppers at the specialty stores are criticized for being hipsters or out of touch wealthy liberals.
Instead of all that negativity, Foster is pointing out the free market is finding a way to use our scarce resources more efficiently to provide a lot of goods cheaper to those who need low priced goods and still providing specialty goods to those who have the means.
All of the negativity stems from anti-capitalist bias against the market.
It is not just the intelligentsia that promote this bias. Strangely businesses do it, too, hence, the clamor to adopt CSR policies.
Economist Joseph Schumpeter focused on the role of the entrepreneur in our economy.
You may have heard of him for the theory of creative destruction that recognized the process described above. Whenever there is innovation, some older business will be destroyed, which frees up resources to be reallocated to the new businesses.
It is a vital part of capitalism because otherwise we would still be using horse drawn wagons instead of cars. Think of all the wagon maker and buggy whip manufacturers who lost their businesses when cars came out! But at the same time, think of all the businesses that could exist only after cars were produced.
Foster brings up Schumpeter to mention the 3 reasons he thought capitalism would fail. (p. 364)
- The innovation of the entrepreneur would end up being systematized by corporations.
- Business proprietorship would give way to corporations’ diffused power management.
- Its wealth allowed the financial support of the “scribbling set” of anti-capitalist elites.
The first two surprise me a bit. Yes, they would happen to any invention over time. Look at cars again. At one time they were a disruptive invention but over time they developed into behemoth corporations that did fight outside innovation.
So he is not wrong there. Except I don’t see why he did not see that creative destruction would continue in other areas of the economy even if one sector becomes routine. Like the tech companies decades later disrupted everything.
I am just saying entrepreneurship is not going to die out just because some new industries become the status quo over time. Entrepreneurs are always looking for new opportunities.
The third one though is very interesting.
Foster notes that the rise of Global Salvationism, and its embrace by corporations, would not have surprised Schumpeter at all. (p. 364)
“Perhaps the most striking feature of the picture,” he wrote, “is the extent to which the bourgeoisie, beside educating its own enemies, allows itself in turn to be educated by them.” (p. 365)
I suppose the “suicidal tendencies” of business really should not be that surprising. (p. 365) Given the anti-capitalism biases that so many hold, they bring them into the executive boardrooms.
Entrepreneurs are less likely to think that way, but those who aspire to work in the controlled and staid corporate environment would feel more favorable towards planning and more hostile to the idea of the chaotic market forces.
Conclusion
Both Corporate Social Responsibility and Global Salvationism misunderstand the nature of the power of business.
One key assumption at the heart of corporate condemnation was that control of economic resources was synonymous with oppressive political power. The corporation was like a greedy person who got rich by exploiting others and despoiling the environment. According to “stakeholder theory” — the academic embodiment of zero-sum carcass economics — management was declared to be concerned exclusively with shareholders, to the exclusion, and at the cost, of all others with whom they dealt.” (p. 367)
Foster notes that businesses do not have the freedom to pursue profits at all cost. They have to care about their reputation and won’t willingly take actions that will turn their customers against them.
Businesses are in the business of serving customers and no policy that undermines that will last long if the business wants to continue.
Also, we already have a web of laws and regulations on the books to protect employees and the environment so it is not as if these “stakeholders” need any further intervention from the “scribbling set.”
In fact, the push is coming from the scribbling set because it promotes their importance and harms the capitalist system they dislike.
This unhealthy combination of business power and anti-capitalism has been turned green and is where Foster ventures next.
In fact, the main problem for corporations in the early 21st century was having externalities greatly exaggerated, or entirely falsified. Still, some “enlightened” businessmen were more than prepared to bear, publicize or even greatly exaggerate the charges of environmental rape and pillage that were now central to the anti-capitalist critique. (p. 374)
Reference: Foster, Peter, 2014. “Global Salvationism” Chapter 15 of Why We Bite the Invisible Hand, Pleasaunce Press.
