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Friday, December 29, 2017

Free Markets and Business Don’t Require Greed

Business activities are neither inherently soulless nor inherently greedy.

Defenders of free markets often do more harm to their cause than detractors. One of the first of these defenders, the 18th C satirist, Bernard Mandeville, makes two fundamental errors in his argument for free markets. He equates self-interest in the economic realm with greed, and he fails to realize that the so-called “private vices” of greed and vanity have social costs that make them, at best, very mixed “public benefits.”

In his infamous story, “The Fable of the Bees; or, Private Vices, Publick Benefits (6th ed., 1729), Mandeville proclaims that the great advancement in people’s welfare in the early 18th Century is due to the vices of the wealth-creating individuals. Vanity and greed motivate people to work hard and produce. Consequently, discouraging vice and encouraging honesty and other virtues are foolish as it leads to poverty. If we want “the hive” to be “a paradise,” we should want it to remain full of vice (The Fable, Vol. I, pg. 31).

It is true that vanity and greed can lead an individual to work hard and become rich. But there is no reason to believe that these traits are the best motivators of hard work and wealth, or that if most people were motivated thus, society would become wealthy. Mandeville’s claims rest on his crude, unnuanced conception of vice (and virtue).

Greed and Vanity

He labels all desires and actions to produce wealth beyond subsistence level as greedy, instead of only those that (in Aristotelian language) are excessive in some way. These include desires and actions that lead you to step over other people, or act dishonestly, or break your word, or devalue your family and friends, all for the sake of making more and more money.

Mandeville seems to think that the only alternative to greed is self-sacrifice, which is rather like thinking that the only alternative to gluttony is starvation, or that the only alternative to cowardice is recklessness. His moral psychology leaves no room for rational self-interest, or for recognizing that working and creating value is a fundamental need for most people even when it doesn’t lead to great wealth. Examples abound: think of entrepreneurs who risk all their savings on a new cafe, or a new app, or a DNA testing service, or a “tiffin” service for office workers in Mumbai. Mandeville sees no intellectual or moral virtue in such entrepreneurship, or in carrying out a task well because, in his view, they are all motivated by greed and vanity.

This conflation of greed with self-interest harms the cause of free markets. Mandeville also indicts honesty as detrimental to the economy in an argument that shows his poor grasp of a fundamental principle of economics: opportunity cost. In an early version of what Frédéric Bastiat later called the broken window fallacy, Mandeville argues that if everyone became honest, locksmiths and lawyers would lose their jobs and society would be harmed. What he overlooks is the loss to the victims of dishonesty, and the fact that, if there were no dishonesty or other vice, people would use the money they saved on locks and lawyers to lend or spend on services or consumption goods – provided, among others, by the erstwhile locksmiths and lawyers. The result would be the creation of far greater value for everyone involved than if people had to buy locks or lawyers in self-protection. Dishonesty creates a deadweight loss, and widespread dishonesty hinders or renders impossible ongoing cooperation and success in the marketplace.

Mandeville’s view that private vice leads to public benefit might even be incoherent. If it’s greedy to want more than the bare minimum, then prosperity cannot be an unmixed public benefit. It’s a public benefit to the extent that it relieves the lot of the poor, but if Mandeville is right that prosperity feeds people’s greed and vanity, it’s a harm, not a benefit. In “The Grumbling Hive” Mandeville says:

“Vast Numbers throng’d the fruitful Hive;
Yet those vast Numbers made ’em thrive;
Millions endeavouring to supply
Each other’s Lust and Vanity …”

Perhaps Mandeville thinks that feeding people’s vices is not harmful to them because vice and harm belong to different categories. If this is his reasoning, then his view that private vice is publicly beneficial is saved from incoherence, but only at the cost of utter implausibility. One does not have to believe in a soul or a god to believe that vicious traits, motives, or actions are vicious in part because they tend to undermine the agent’s peace of mind and harm her character and relationships with others. Moreover, Mandeville himself claims that people’s greed and vanity leaves them dissatisfied and unhappy, whereas when they become virtuous, they are “Blest with Content and Honesty.”

But Mandeville’s views are not merely of historical interest. In spite of Francis Hutcheson’s and Adam Smith’s criticisms of Mandeville, the conflation of self-interest with greed is common even now. In a six-part series on greed and business, John Stossel and some of his guests identify greed in business with the profit motive and claim that greed is good for a flourishing economy. Like Mandeville, Stossel doesn’t pause to distinguish greed from rational self-interest or to ask if greed is consistent with honesty and integrity.

In various TV appearances, even Milton Friedman has responded to the claim that people in capitalist societies are greedy with the words, “Isn’t everyone?” — before going on to point out that capitalist societies are the only societies that have raised the masses from poverty. This conflation of greed with self-interest harms the cause of free markets because greed is ineluctably associated with the image of an ugly, short-sighted man with two grasping hands. And rightly so, because the idea of an inappropriate love of money (or power) is part of the very meaning of greed.

The Purposes of Business

Another widely-held thesis that feeds into this unlovely image of business is that the only social responsibility of business is to increase its profits (Friedman, “The Social Responsibility of Business is to Increase its Profits”). In spite of its title, Friedman’s argument in this essay is directed not at all businesses, but only corporations. His main contention is that it’s wrong for corporate executives to discharge their “social responsibilities” by using shareholders’ money without their consent or engage in any “social” activity even with the shareholders’ consent if it doesn’t contribute to the corporation’s long-term success. The only purpose of a corporation is to maximize its profits by engaging “in open and free competition without deception or fraud.”

Entrepreneurs start businesses in order to make money by doing something that inspires them. In a debate with Friedman, however, John Mackey points out that this view fails to recognize that businesses are created by entrepreneurs for all kinds of purposes, purposes of which investors are aware before they invest in the firm. From the entrepreneur’s point of view, profits are a means to the fulfillment of a company’s purpose, not the end.

Mackey has a point. Henry Ford’s aim in creating his company was to make a good quality, affordable car, not simply to make a profit any-old-how. Profit enabled him to keep innovating and producing better and better cars. The thesis that the only purpose of business is to make a profit is analogous to the thesis that the only purpose of a novelist is to write novels that sell, or that the only purpose of a doctor with a private medical practice is to make a lot of money.

But must we choose between Friedman’s and Mackey’s descriptions of a company’s purpose? I think not. There is a third alternative: profit is a means of producing the good the business was created to produce, and the good is a means to making a profit. Entrepreneurs start businesses in order to make money by doing something that inspires them, or engages their interest, or at least fits their skill set. The substantive goal of a business, the one that differentiates one business from another, is the product it exists to create or sell.

If you ask your friend why she opened a garden center, given that it’s expected to make less money than, say, a café in that spot, she is not answering your question if she says, “In order to make money.” This is the right answer to the question for those shareholders or employees who don’t care about the product, but not, typically, for the entrepreneur or the initial investors in the company.

Omitting the fact that businesses exist in order to make or sell a good or service leaves us with the “soulless” view of business that partly explains why business people are held in low regard by society as money-grubbers. The mere fact that people tend to be suspicious of those who make a lot of money doesn’t fully explain this low regard, since people in other professions who earn big bucks and own multiple mansions, such as Hollywood actors or athletes or rock stars, are not held in low regard.

“Market” Virtue

In recent years, economists have written defenses of market activities and market societies in virtue-ethical terms. Sometimes, however, they end up supporting this soulless view of business. A case in point is the well-meaning defense by Luigino Bruni and Robert Sugden of what they call the “market virtue” of respect for one’s trading partners’ tastes. They argue that this market virtue implies that the manufacturer or seller ought not to patronize the customer by making or selling only what he is intrinsically motivated to make or sell. The business person should treat his trading partner as an equal. Hence, if he is a craftsman or professional, he might have to compromise his standards of excellence when he engages in market transactions. And this is justified, according to Luigino and Sugden, because market exchange has its own standards of excellence. The customer is always right.

But is respect conceived thus a virtue? And how can the manufacturer or seller be equal to the customer if he has to compromise his standards to please the customer? The attitude that Bruni and Sugden recommend is compatible with equality and mutual respect if the product in question is just a matter of taste such as blue walls or Berber carpets or sour candies. There is no reason why the producer should not cater to his customers’ tastes because pleasing their taste is the whole point of producing a variety of paints, carpets, or candies.

Business activities are neither inherently soulless nor inherently greedy. But surely crafts and professions involve more than just would-be customers’ tastes. They involve standards of excellence that the craftsperson or professional must meet out of self-respect and respect for her craft or profession. The attitude Bruni and Sugden endorse entails that Howard Roark, the famous hero of The Fountainhead, was wrong to refuse to build buildings without integrity in order to please his customers. By the same logic, it entails that, qua business people, novelists are wrong to refuse to write formulaic novels guaranteed to sell well just because they don’t meet the novelists’ standards, and actors are wrong to refuse roles in movies expected to be box office hits just because they violate their artistic standards. In short, Bruni and Sugden’s thesis entails that integrity is incompatible with market transactions, an implication that they themselves would surely not welcome.

But there is no reason to accept their premise that the standards of excellence for market exchange may require compromising the standards of excellence for craftsmanship and professionalism. When Roark explains to his customers why he doesn’t build buildings that are a hodge-podge of styles from different centuries, styles that no longer serve the purpose they once served, he treats both his customers and himself with respect.

A final problem is the tendency among utilitarian defenders of free markets to whitewash the behavior of businesses when they actually do greedy and unjust things by pointing to the benefits they produce for society and blaming the law or the government for their injustice.

For example, it is sometimes said that if the government uses the doctrine of eminent domain to seize someone’s property without her consent, or without due compensation, in order to help a business, the fault is the government’s, not that of the business. But if the government’s actions are instigated by a business, how can it not be the fault of that business as well? No one is forcing the business to induce the government to make a land grab on its behalf. The business’ responsibility to maximize profits is meant to be constrained by the demands of justice. In India, such land grabs are one of the reasons that thousands of farmers have committed suicide in recent decades.

Business activities are neither inherently soulless nor inherently greedy. Indeed, widespread prosperity requires entrepreneurial passion, innovation, rational self-interest, and trust, and trust requires justice, honesty, and integrity. Defenders of free markets must recognize this if they wish to succeed in defending them.

Reprinted from Savvy Street.

  • Neera K. Badhwar is Professor Emerita of Philosophy at the University of Oklahoma, where she taught from 1987-2010, and an affiliate at George Mason University.