A discussion of “Revisiting the Purpose of Business”
I am an economist and a lot of what drew me to the field early on is the Adam Smith story of the Invisible Hand.
Briefly, it is the idea that our self-interested nature is channeled, as if by an all-knowing Invisible Hand, to an allocation of our resources that is optimal, even better than what a planner could have come up with.
Taking something that is of questionable value, our self-interested nature, and creating something that benefits all, — it seemed so beautiful and compelled me to study economics in the search for answers to our problems.
Now, even in the beginning, I knew there were limits to this idea. It does function, and function well, when inside of the constraints of competitive forces that balance each other out.
But it begins to fail when there is asymmetric information, or market power, or market failures. There are remedies for these issues, some by harnessing the power of the market and some by regulating it.
Yet, because of these failures, critics of capitalism too often want to toss out the capitalist system and replace it with planned solutions. The inherent problem with economic planning that dooms it to failure is the lack of a pricing mechanism.
Prices are the key to the success of a market system. Wrapped up in a price is all the information we need to make the optimal decisions, both buyers and sellers.
Rising prices tell buyers to be more judicious in the use of that product, maybe find substitutes or invent ways to get more with less. Sellers are incentivized to find ways to provide that product since clearly people value it.
Planners cannot know what price to set because they cannot know all the information. Markets are decentralized and the prices are shaped by the millions of buyers and thousands of businesses interacting.
Planning is centralized and it cannot solve this information problem. Shortages and the quintessential bread lines of a communist country, taking this to the extreme, are the eventual outcome.
Since I think the Invisible Hand idea of the competitive market is the best solution when it can function, I bridle at movements away from capitalism because I know it ends in shortages and misallocation.
And yet, examples abound of capitalist companies caring only about profits at the expense of people and the environment. Is there any way to keep my capitalism but deal with these real issues?
The Model: Value, People, Planet
Bamber and Borchers (2020) have put together a survey article addressing these issues from a literature that is largely new to me. They do come at it from a biblical view, but don’t stop reading because of that.
They examine several prominent models for the purpose of business and compare them to the model they propose to balance the profit seeking nature of capitalism with the social and environmental needs that can be overlooked.
Specifically, they lay out this 3-part framework: (p. 48)
- Create Value
- generate profits
- creation of beneficial goods and services
- innovation and global discoveries
2. Care for People
- acknowledgment of the value of work providing purpose to the workers
- applying the Golden rule — treating customers AND employees AND stakeholders as you would have them treat you
- providing for those less fortunate
3. Tend the Earth
- rest for the land and people — acknowledging cyclical needs to restore both land and people
- tend the environment
- natural capital is shared by and for all — even though people or businesses have private property rights to land or resources, they must act in a way that benefits all in their use of this natural capital
With this comprehensive set of values to consider that they sum up as Value/People/Planet, they evaluate several approaches others have proposed for how business should work.
Friedman’s Focus on Value
The first one is one of the reasons I wanted to write about this because it sets the framework I have been taught: Milton Friedman’s declaration of the purpose of business, “The Social Responsibility of Business is to Increase Its Profits,” written in 1970 for the New York Times Magazine. (p. 49)
The authors acknowledge that Friedman likely did not mean this article “to capture a full view of all the purposes of business.” (p. 51) However, they also note that Google Scholar shows it has been cited over 17,000 times indicating its pervasive influence on business academics.
Fitting this argument into the 3-part framework of Value, People, Planet described above, it is decidedly lopsided. It is only concerned with Value and even that is largely focused on generating profits. The benefits of the products and services to people is largely a side effect of seeking profits.
While I do think many arguments against capitalism forget the value of profits as a motivation for businesses to function and a platform for the Invisible Hand to do its magic, a one-dimensional focus on profits like this is likewise detrimental.
If profits matter above all else, one way to increase them is to lower costs, and one way to do that is pay labor as little as possible. If “Care for People” is not a part of the value system, then that is a likely outcome.
Likewise, destruction of the environment can also be an outcome because a more expensive method that causes less damage could lower profits.
The authors then look at 3 other systems that have received attention over the years that do a better job at considering more parts of the 3-part framework.
Elkington’s Triple Bottom Line
First is, John Elkington’s 1998 book, Cannibals with Forks, proposing a “Triple Bottom Line” where business would consider economic prosperity, environmental quality and social justice. (p. 51)
The authors point out that the results of this was primarily the creation of metrics that may or may not result in a significant change in the purpose of business that will improve its function within the 3-part framework.
Metrics currently used include the Dow Jones Sustainability Index, Sustainability Accounting Standards Board, and other measures.
Even if this movement eventually succeeded, the authors note that when it comes to “Care for People,” it does value providing for the poor but not acknowledging the value of work providing purpose to the workers or applying the Golden rule to customers, employees, and stakeholders.
Mackey and Sisoda’s Conscious Capitalism
Next, the authors discuss Mackey and Sisoda’s 2014 book Conscious Capitalism that explained the success of Whole Foods. This one comes close to hitting all the parts of their 3-part Value, People, Planet framework, except for providing rest for the land and people as part of “Tending the Earth.”
I suppose its secular focus is why they prefer the next model more they discuss, but they do sum up the main points of Conscious Capitalism by quoting its Conscious Capitalism Credo.
We believe that business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence, and it is heroic because it lifts people out of poverty and creates prosperity. (p. 53)
Now that is something I can get behind. While I feel that the Friedman article comes closer to the framework I was taught, I think this comes closer to what should be taught. Essentially, we need a wider view of what should be maximized than just profits. That is, as our authors are arguing, we need to consider People and Planet along with Value.
Roche and Jakub’s Economics of Mutuality
The last model they look at is Roche and Jakub’s 2017 book, Completing Capitalism. (p. 53)
As I have been taught, there are 4 resources for production: labor, capital, natural resources, and entrepreneurship. Capital is usually focused on financial capital.
Roche and Jakub go further by dividing capital into 4 types:
- financial
- human
- social
- natural
and assert that “firms need to remunerate each of these forms in order to prosper in the long term.” (p. 53)
The authors find this work is the only one that puts weight on all parts of their 3-part framework. Some of the examples and explanations they give of Roche and Jakub’s “economics of mutuality” are encouraging.
- “Every stakeholder in the (supply) chain, beginning from the farmer who grows cacao and extending to the production process at a large company and the retailer who sells the chocolate, has an important part to play. A large consumer-goods firm may be encouraging unsustainable environmental or labor practices in a supply chain if their final selling price is too low to give sustainable profit to each stakeholder involved.” (p. 54)
- Roche and Jakub discuss an implementation in Mars, Inc. where they relied on social capital in Manua, Kenya, to devise a solution to the “last-mile route to market.” Using social capital endogenous to the area to solve this distribution problem actually strengthened social and human capital in the area and the money earned reduced poverty. On top of all that, it turned out to be a very profitable distribution channel for Mars. (p. 54)
- When we think of financial capital, we focus on the monetary returns to capital. But when we include these additional types of capital, we can expand our measure of return. For example, if a firm is using natural capital like oil and gas, they can offset the carbon by planting trees, another type of natural capital. (p. 55)
Conclusion
To some extent what the authors are addressing is the need to move from the neoliberal school of thought that has dominated economics for the past few decades, an issue I have explore before.
Time for a Paradigm Shift in Economics?
Since I do think a market- centered system has the best chance of using our resource wisely over any planner-centered system, widening our view of the purpose of business is what is needed to defend capitalism.
And by considering not only Value, but also People and Planet, we can balance the use of all our resources in a way that benefits all as compared to a system only focused on Value. Interestingly though as some of the examples from Roche and Jakub show, the inclusion of People and Planet can actually lead to increases in Value.
Thus, a broadening of the purpose of business from just being about profits to a 3-part framework — Value, People and Planet — can allow the purpose of business to benefit us all.
References:
Bamber, Joseph and Andy Borchers (2020). “Revisiting the Purpose of Business.” The Journal of Biblical Integration in Business, 23(1): 47–57.
By Ellen Clardy, PhD on .
Exported from Medium on December 15, 2022.
