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The Political Firm

Jonathan Weisman's Bias... Henderson and Williams on Free...

by Pierre Lemieux

This competitive discipline is a feature of the free-enterprise system, not a bug. That's why your fuel oil delivery man doesn't care about your race, sexual preferences, or political opinions; he just wants a check.

One can, à la James Buchanan, imagine politics as exchange. With Gordon Tullock, Buchanan wrote:

Men co-operate through exchange of goods and services in organized markets, and such co-operation implies mutual gain. ... At base, political or collective action under the individualistic view of the State is much the same. Two or more individuals find it mutually advantageous to join forces to accomplish certain common purposes. In a very real sense, they "exchange" inputs in the securing of the commonly shared output.

But under Leviathan, politics is more the activity or the art of forcing some individuals' preferences on other citizens.

peaceful exchange.jpg In a recent issue, The Economist observes that business is becoming more political in America. Politicized businesses do not only feel obliged to take a stand on political issues, but they often want their preferences to be, in some way, forced upon members of society who don't share them. The chairman of Starbucks, reports the magazine, "champions the idea that firms should serve both their shareholders and a broader set of interests, including staff and civil society."

The politicization of businesses could correspond to a demand-- real, money-backed demand-- from their employees. The magazine reports that,

... many bosses feel that they have little choice but to respond to their staff, who are increasingly vocal on political and on cultural issues. ... 44% of millennial American employees say they would be more loyal to their company if their boss took a public position on a societal issue.

If the requirement is simply to fill the annual report or press releases with cheesy social nonsense, it may not cost anything to the company. But if it implies different production methods or hiring different employees--not hiring those who don't like the company's public positions, for example--there will be costs, just like there would be to practical expression of political preferences by firm owners.

However, competition from non-politicized suppliers should prevent the politicized ones from charging more to cover their additional costs. Market competition would insure that the politicization costs are paid by the firm itself, and is limited to what employees or owners are willing to pay out of their own pockets. Because employees are as greedy as firm owners, internal demands for "societal" grandstanding will thus be limited.

This competitive discipline is a feature of the free-enterprise system, not a bug. That's why your fuel oil delivery man doesn't care about your race, sexual preferences, or political opinions; he just wants a check. That's why you normally don't have to recite a political profession of faith as a condition of employment; your employer just wants to hire your technical talents. That's why firms are not corporatist clubs or medieval guilds with customer satisfaction as a second thought.

Demand for politicization could come from the consumers themselves. Some consumers may prefer to buy from firms who donate more to the Republicans or to the Democrats. An app called BuyPartisan provided that information simply by scanning products barcode. However, the company's website shows no activity since 2015, just one year after its founding, and the app (still available at Apple's App Store) does not seem to work. This is not surprising, for the same reasons that consumer boycotts are rarely effective. The mass of ordinary people do not want to pay--in higher prices--for expressing their political opinions. As a woman in a Safeway supermarket told the Economist reporter, "If I want to eat gummy bears, I will eat gummy bears. I don't care if they're Republican." At least one-third of voters don't vote even if it is an inexpensive means of expression.

To the extent that some workers, firm owners, or consumers have a "taste for discrimination" (to borrow an expression from Gary Becker), firms will try to discriminate--say, by hiring only non-gun-owner types or by not selling cakes for certain occasions. But the competition of firms for customers and employees will oblige those who discriminate to support the cost their discrimination--in higher prices or in reduced wages or profits. Markets will converge to trade-offs that reconcile the preferences of all actors, consumers and producers (owners and employees). If you don't hire people on the basis of competence only or choose not to deal with certain people, you pay the price.

All this is related to the "social responsibility of business." Why can't business be socially responsible in the sense that they answer to society's demands? Why can't they pursue "the satisfaction of society," to quote a business association's report of the 1970s (quoted in Archie B. Carroll, "A History of Corporate Social Responsibility")? Except in the sense of answering the demands of individuals on the market, businesses cannot be responsive to society when "society" has different demands. And "society" does have different demands because it is made of individuals with different preferences and circumstances. The "societal goals" mentioned by The Economist are only the goals of certain individuals (except with regard to very abstract ideals such as peace and prosperity, which may be considered public goods desired by all).

Incidentally--or not so incidentally--"societal" is a strange word, and The Economist often relapses into the standard term "social," writing both "societal issues" and "social issues." The difference between the two words is not clear, except that "societal" looks more serious, scholarly, scientific. "Societal" may also relate to a desire to "modify the structure" of society, to engineer society. Or it may reflect a view of society as having primacy over individuals. I hope to come back on this issue in a future post, and any input would be appreciated.

Pushing corporations into a uniform moral agenda--outside of a basic prohibition on fraud--may look good when the prevailing "social norms" are commendable, but many historical cases show the drawbacks of this approach. Was it the firms' social responsibility to respect apartheid in South Africa or to discriminate against Jews in Nazi Germany? It is better that business be free to serve any consumer to whose demand they choose to respond. Greed and competition will insure that no market demand remains unmet.

Milton Friedman famously argued that "the social responsibility of business is to increase its profits." He pointed out that business executives have no mandate to "tax" consumers, employees, or shareholders, in order to finance the satisfaction of their own preferences about what social responsibility requires. We may add that businesses should of course be free to try other formulas, but at their own cost, and without trying to impose what they prefer on others.

Politicization of businesses works in the opposite direction. It transforms the firm from a private association into a quasi-governmental organization. And it creates a vicious circle where politicization calls for more politicization, if only in self-defense, and breeds conflict.

The general politicization of society is probably a major factor in business politicization. With growing state power and the idea that the best solution to every problem is a coercive, government-imposed solution, all social relations tend to become politicized, that is, enmeshed in the agendas of political authorities. Businesses are politicized because they want or need to please Leviathan.

Comments and Sharing

CATEGORIES: Business Economics

COMMENTS (10 to date)
David R Henderson writes:

Excellent post, Pierre. Really well done, linking the social responsibility issue with the Becker insights about the economics of discrimination.

Pierre Lemieux writes:

Thanks, David. From you, it's very much appreciated. (I had some good practice in your "Featured Article" section!) This "social responsibility" issue provides a constant source of inspiration.

R Richard Schweitzer writes:

What we are probably observing are broad categories of relationships and the circumstances in which they occur.

Where certain principal or predominant objectives of the participants are discernable we label the interactions as "business."

With the development of "Open Access" in the formation of associations, what were formerly (at least to some degree) inter-personal relationships have become less so, and with increased specializations have become more and more impersonal, resulting in the involvements of third (and other) parties with the participants (or in the often several circumstances necessary to effect the purposes of the relationship).

The rise of involvements of non-participatory others (which are often interpositions) in relationships (or in the necessary circumstances) has brought with it opportunities for political and social interventions that impact the directly concerned participants and their objectives.

Where the needs for third party involvements, as a means to the objective ends, are displaced by interventions of others with differing objectives, the means can be seen to overwhelm the ends.

The impacts of interventions are beginning to be more broadly recognized. What will be done remains to be seen.

Hazel Meade writes:

I would add one caveat. It's possible that some firms could be induced to discriminate not by the owners preference, but by the preference of other customers. For example a restaurant in a town with a lot of prejudiced white people might be compelled to discriminate against blacks in order to avoid losing the business of the majority whites. There is no guarantee that the "socially optimal" solution from the standpoint of a majority ethnic group is going to be just to members of the minority. Just a thing to consider.

Walter Clark writes:

I believe the point here is that monetary self-interest in an environment of competitive free markets provides a sufficient mechanism to mitigate biases (and other harm) that a particular society finds bad and wants to have less of.
Most people reading this are convinced that government version in the form of diktats is an inefficient way to improve mankind and often worse than doing nothing. But are we willing to see that maybe the "invisible hand" has trouble too for some things that would be nice if there was more of or less of. Is there any economic incentive to make depression go away or have more research in an area that has no anticipated production value?
To quote the author above "If you don't hire people on the basis of competence only . . . you pay the price."
Well... many people are willing to pay the price. Maybe they would be willing to take the hit by hiring only women for example. Removing Jim Crow Laws was the biggest improvement but not the solution. The solution was done before then in the form of the Civil Rights Movement; not the Civil Rights Act.
It should be clear that social movements and charitable giving to fund them is a third way to solve problems. A way not mentioned above. It can be in the form of corporations, rich people or those that could afford the time to be very-noticed in their cause. Just as the corporate tax is passed on to the customer, so too is corporate philanthropy passed on. Both make them less competitive; less profitable. If you view that extra market cost as doing something that might improve society, then the economist must advocate for such anarchical welfare as better than a government expert doing welfare activities as a monopolist using robbed money.
A case can be made for the fact that philanthropy is actually part of the economy in that where the money goes that changes hands is determined by the one deriving the psychic pleasure; not the charity. That spending is in competition not only with other charities but more importantly, with yet another yacht or even better eating.

Hazel Meade writes:

To quote the author above "If you don't hire people on the basis of competence only . . . you pay the price."
Well... many people are willing to pay the price. Maybe they would be willing to take the hit by hiring only women for example.

Or, as I was arguing above, the "hit" might actually be in the opposite direction. What if most customers refuse to do business with a company that employs women? This is conceivable in (for instance) socially conservative places like Saudi Arabia. What if 90% of the customers are conservative Muslims who are offended by women working in public or not wearing head scarves or something to that effect. They can effectively impose their preferences on businesses. It is by no means guarenteed that non-discrimination is a stable and efficient optima in every society. It depends on the society.

Jon Murphy writes:

@Hazel Meade

It is by no means guarenteed that non-discrimination is a stable and efficient optima in every society. It depends on the society.

Very true. However, free markets still make discrimination more costly. Even if it is socially optimal, it is still more costly. Thus, the incentives are in place to reduce social norms geared toward discrimination (eg the Reconstructionist South). It may be a slow process, but the incentive structure is there.

Walter Clark writes:

@Hazel Meade
"It is by no means guaranteed that non-discrimination is a stable and efficient optima in every society. It depends on the society."

Yes, well said.
It is good to step back from what we think is good and show how economics plays a role in reinforcing what the culture wants, even if it means women are to remain as well-liked slaves.
And that a part of that culture are those social warriors and rich people who are willing to take an economic hit to popularize whatever is in their hearts.

Hazel Meade writes:

@Jon Murphey,
It might be more globally optimal to not have discrimination, but there might not be a path to get there from the locally optimal state of culturally enforced discrimination. You could get stuck in a local optima.

Jon Murphy writes:


You could get stuck in a local optima [sic].

Agreed 100%. Rather, my point was with free trade the incentive to shift that optimum is there. Without free trade, that optimum is not shifting.

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