On Corporate Altruism-Becker

In the past few decades, economists have analyzed the competition from companies motivated solely by the desire for profits against companies truly motivated in part by other considerations. These considerations include altruism toward consumers, discrimination against minority employees, and a desire to help the environment by using carbon offsets to own carbon emissions. A main message from this analysis is that companies that forego some profits to pursue other goals have trouble competing against profit-maximizing firms. An example is the competition between firms that hire workers solely on the basis of their productivity and cost, and companies that give up profits to avoid hiring African-Americans or other minorities because they are prejudiced against these types of workers. Since firms only interested in profits will hire minority workers when that is profitable, and prejudiced firms will not, discriminating firms will be under a competitive disadvantage (for the details of the analysis, see my The Economics of Discrimination, 2nd Ed.,1973). Companies that combine the profit motive with environmental and other concerns can thrive in a competitive environment only if they are able to attract employees and customers that also value these other corporate goals. Then the added cost of pursuing non-profit goals would be partially, if not entirely offset, by having customers who pay more for their products, such as fair-traded coffees. Or these companies may be able to attract high level employees relatively cheaply perhaps because the employees are excited by the prospects of spending some of their working time developing vaccines that can treat diseases common in poor countries. These appear to be the types of companies that Bill Gates wants at the forefront of his "creative capitalism" since he is encouraging companies to pursue recognition as well as profits. How successful can this form of capitalism become? Gates quotes with approval the opening discussion in Adam Smith's great 1759 book The Theory of Moral Sentiments on the importance of altruism in human motivation. While this book does deal with motives like concern for others, and the desire for recognition and acclaim, Smith was skeptical not about the strength of altruism, but about its scope or reach. For example, he uses an example in this book that is highly relevant to the present and to Gates' quest. He asks "how a man of humanity in Europe: would respond to hearing " that the great empire of China… was suddenly swallowed up by an earthquake…"? His answer was that "If he [this man] was to lose his little finger tomorrow, he would not sleep tonight; but, provided he never saw them [i.e, the people of China], he would snore with the most profound security over the ruin of a hundred million of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him than this paltry misfortune of his own" (Part III, Chapter 3). Globalization has brought the situations in China, India, Africa, and other poor parts of the world much closer to the concerns of men and women in rich countries than they could ever have been in Smith's time. Still, essentially for the reasons given by Smith, it would be quite difficult to get many companies in richer countries to be highly motivated by the desire to find cures for diseases that are not profitable because they only afflict persons living in Africa and other poor countries who cannot pay much for the cures. It would not be any easier to get companies to spend significant resources to help lower carbon emissions, unless these expenditures were forced by governments, or compensated by governments and private philanthropies. Nevertheless, unlike the well-known negative position on corporate responsibility taken by my great teacher and close friend, the late Milton Friedman, and apparently also by Posner, I do not see anything counterproductive with Gates and others giving encouragement to corporations to be more concerned with goals like distinction along with an interest in making profits. The real test is how viable such motives are in a competitive market environment where the competition also includes companies motivated only by profits. My own belief is that there are far more effective ways to help poor nations of Africa and elsewhere speed up their rates of economic development and reduce the impact of malaria, Aids, and other devastating diseases. Probably the single most important step is to encourage much more market-friendly policies by African and other governments in poor countries. In addition, it would help to reduce, better still eliminate, tariffs by rich countries on the agricultural and other exports from developing countries, encourage more widespread use of DDT and mosquito netting in combating malaria (see my post on deaths from malaria on Sept. 24, 2006), and provide private and perhaps public subsidies to the development of new drugs that help fight diseases mainly found in poor countries.

Comments

[A student of Economics]

"I do not see anything counterproductive with Gates and others giving encouragement to corporations to be more concerned with goals like distinction along with an interest in making profits."

Interestingly, this advice can be, to some extent, self-fulfilling. If people think it is legitimate and reasonable to care for other people and make business decisions based on them, then more people will do so, and that, in turn, will make it more profitable to do so -- a virtuous circle.

[Brn2Run]

Very thoughtful post. Important to keep in miond that maximizing shareholder value and doing the "right" thing are not mutually exclusive.

[Jim Leitzel]

A little more context for Adam Smith and the Chinese earthquake might be helpful. Smith was trying to sort out the role of conscience. While the impending loss of our little finger might not allow us to sleep as soundly as we would in the wake of an immense but distant catastrophe, would we be willing to trade our little finger to prevent the catastrophe? Of course, Smith says -- our "active principles" are generous even as our "passive feelings" are selfish.

[Diversity]

A corporation that is, or is likely to be, subject to regulatory or other political risk will minimise this risk if it builds up political goodwill. The larger the corporation and the longer its planning horizon, the more it is likely to be aware of the point. The goodwill of individual political leaders is notoriously unreliable, The result is "corporate altruism" as an instrument for maintaining long term profit levels.

Some time ago, when I worked for Shell, I analysed their corporate policies, with the conclusion above. The only corporate altruism that I have seen since which does not fit that model is Google-type; where acting altruistically attracts lively minded employees who are unlikely to concentrate on screwing the last dime out of the company.

It has always seemed to me that the market has aligned these commercial incentives quite nicely with my notion of benefits to society.

[Thomas B.]

The call to reduce "tariffs by rich countries on the agricultural and other exports from developing countries" surprised me. The US and EU tariffs are basically nuisance rates at this point, typically around 3%, while developing nations maintain tariff rates closer to 50%. (Thus the recent emphasis on harmonizing rates in the WTO, rather than simple flat rate reduction. The wealthier countries have reduced their tariffs so drastically over the past decades, they now have little left to give.) Subsidy reductions are the new hurdle in this area, and are currently the most fertile ground for clever workable solutions.

One of the biggest puzzles remaining for tariffs is why developing nations do not explore lower tariff arrangements with each other.* Some sort of "emerging nations tariff reduction agreement" could greatly benefit many nations around the world. It would allow participating nations to experiment with the benefits of free trade while side-stepping fears of undue influence from the EU and US. Any resulting trade diversion might be the kick in the pants the EU and US need to start seriously considering subsidy reduction.

**While the WTO's general principles prohibit lower tariff rates to select members, there are any number of exceptions that would permit such an arrangement.

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