Archive for the ‘complexity’ Category

Are they Competing, or Just Trying to Sell You Something?

Peaceful coexistence isn’t always a good thing. In the marketplace, competition is what drives different producers of a good to improve their wares, and having one producer explain the superiority of his or her product is — embellishment and puffery aside — how consumers learn to differentiate among products. When different suppliers fail to engage in competition, the consumer is left in the dark. Let me give you two examples.

Here’s the first example. One of the problems — or rather, one of the warning signs — about so-called “alternative” medicine is that there are dozens of different kinds of alt-med, all making different and presumably conflicting assumptions about how the human body works, and yet they all get along cozily together. Nowhere do you find homeopaths, for example, explaining why their methods are superior to those of acupuncturists. Nor do you find Reiki therapists dissing Ayurveda. Crystal therapy gurus are unlikely to tell you about the problems with Traditional Chinese Medicine. And so on. As Robert Park wrote with reference to alt-med, in his book, Voodoo Science (p. 65), “there is no internal dissent in a community that feels itself besieged from the outside.” Of course, the existence of different alt-med treatments isn’t in itself surprising or problematic. Mainstream medicine too uses different treatments for different illnesses. But the different treatments offered by mainstream medicine are all, without exception, underpinned by a single coherent body of theory: the heart circulates blood, germs cause infection, physiological effect varies according to drug dosage, and so on.

So the fact that various systems of alternative therapy, underpinned by very different understandings of the human body (and indeed of metaphysics), can get along so chummily is a huge red flag. It suggests that purveyors of alt-med either a) aren’t thinking critically, or b) are more interested in sales than in healing.

Roughly the same concern arises with regard to different perspectives on how businesses should behave. Some will tell you that the obligations of business are all rooted in the notion of sustainability, with its indelible environmental overtones. Others will say no, it’s a matter of CSR — Corporate Social Responsibility. Still others say it’s all about values. Or leadership. Or citizenship. Or the (ug!) Triple Bottom Line. And each of those seems, at least, to be underpinned by a different understanding of the nature of the firm, its role in society, and what it is that makes an action right or wrong. And yet all kinds of folks seem to want to cleave to all of the above, or to glom onto one of them seemingly at random, as if it doesn’t matter which one you choose.

Again, this should be a big red flag.

I’m sure I’m going to be told that these different schools of thought don’t need to compete with each other — what’s really important, they’ll say, is that, you know, we focus on fixing the way business is done. But again, as with the case of alternative medicines, if someone tries to sell you some and isn’t willing to even try to explain why theirs is better than the other stuff, you should at least wonder whether they aren’t thinking critically, or are merely trying to sell you something.

Organizational Diversity in a Capitalist Society

Today is the 2nd day of a 2-day workshop I’m attending on Regulatory Design, hosted by Duke University’s Kenan Institute for Ethics. I posted yesterday about the difficulty of developing and implementing effective regulations.

Day 2 of the workshop begain with a discussion of a stimulating paper by sociologist Marc Schneiberg, called “Toward an Organizationally Diverse American Capitalism? Cooperative, Mutual, and Local, State-Owned Enterprise”. Marc’s paper is about alternatives to the shareholder-driven corporation that currently dominates industrialized economies. He basically argues that, in the wake of economic crisis, we should at least have a renewed discussion of alternative models of economic organization. To be clear, Marc isn’t suggesting alternatives to capitalism, but rather promoting the idea of experimenting (further) with different ways of organizing business within a capitalist framework. In most jurisdictions, business law makes available plenty of non-corporate options for organizing business. But shareholder-driven firms dominate. So there are interesting empirical and normative questions about the balance between various forms.

Here are some interesting questions to ponder, with regard to this issue in general:

  • Why do cooperatives of various kinds, and other non-shareholder-driven businesses, seem to thrive in some industries but not in others?
  • If in fact shareholder-driven corporations are particularly conducive to instability and crisis, how common do alternative forms need to be in order to have an appreciable effect on the stability of the economy as a whole?
  • From a public-policy point of view, what can (or should) governments do to encourage alternative business forms? (Note that in some places, alternative forms already receive, for example, favourable tax treatment.)
  • Which particular problems (of governance or of ethics) are solved by non-corporate ways of organizing business?
  • What are the costs (socially and individually) of various forms of organization?
  • The profit motive (taken as driving shareholder-controlled corporations) is often singled out for criticism. But all organizations are, by definition, driven by some combination of motives. To what extent, and under what circumstances, are those motives more, or less, likely to encourage anti-social behaviour?

Essential reading for those interested in the empirical side of this topic is a book I’ve recommended here before, and which Marc cites in his paper, namely The Ownership of Enterprise by Henry Hansmann. It’s a dense scholarly book, written by a prominent scholar of corporate law. But for anyone with a serious interest in these topics, it’s well worth the effort. Hansmann’s basic argument (derived from an examination of various case-studies as well as international patterns) is that ownership patterns are best explained by things like a) homogeneity of interests among a group of stakeholders (whether they be shareholders or customers or employees or whatever) and b) the extent to which that group of stakeholders find it reasonably easy to monitor the behaviour of the organization’s managers. In other words, for any organization, some stakeholders want (and are willing to bargain for) control, whereas other stakeholders merely want (and are only willing to “pay” for) a thinner kind of interaction with the organization. The implication is that, if Hansmann is right, any thought that there could be a “better” or even “best” mix of organizational structures, from a social point of view, is going to run up against the fact that the actual mixture is being driven by the desires and capacities of millions of individual market participants, and changing the mix will require changing some of those desires, some of those capacities, or both.

The Earth is Flat (and Regulation is Easy)

I’m currently attending a workshop on Regulatory Design, hosted by Duke University’s Kenan Institute for Ethics.

As a philosopher, I’m often at pains to remind people of the distinction between ethics and law. But there’s also no denying that there are important interrelationships between ethics, on one hand, hand law (and the regulations pursuant to various laws) on the other. When done well, regulations are shaped by good ethical reasoning, aimed at promoting the public good while at the same time respecting individual and collective rights. And it’s very likely that ethical standards are, in turn, influenced by existing legal/regulatory standards.

Regulation of course attracts a lot of attention — arguably a lot more than ethics does — both from industry and from critics, as well as from all points on the political spectrum. It’s a frustrating topic for just about everyone. Just about everyone can name regulations or regulatory agencies that they think are dumb or ineffectual or too powerful or not powerful enough.

The problem — and the reason that makes knee-jerk criticism of particular regulations or regulators perilous — is that regulation is in fact incredibly difficult. Here are just a handful of complicating factors that have arisen during our workshop discussions, so far this morning:

  • People generally don’t like to be regulated. That means that people (and the organizations they populate) tend to push back when you try to regulate them.
  • Regulated industries have the capacity to push back, not just by means of political contributions and advertising campaigns, but also by means of court challenges that can be costly and time-consuming for regulators. This means that the regulatory process must very often be a process of negotiation.
  • Good regulations should be based on evidence, but that poses problems when what you’re trying to regulate is a danger that is very large in scope or severity but that is either unprecedented or that cannot be measured in advance.
  • Regulatory agencies face challenges in attracting and retaining smart people. This is true for two reasons. First, it’s hard for public-sector organizations to compete with the private sector in terms of salaries. Secondly, in order to take seriously the idea of a career at a regulatory agency, young people need to have the sense that they are going to be able to make a difference, which is not always the case.
  • Perceptions of new regulatory efforts, even when those efforts originate with experts within regulatory agencies, can be coloured by perceptions of the government of the day. Those who are critical of the government of the day are likely to be skeptical of regulatory efforts that come about during that government’s reign, regardless of whether it is actually driven by the government’s policy platform or not.
  • Effective regulation requires detailed understanding of the thing being regulated. Very often that means that regulators must rely upon those being regulated as a key source of information. The conflict of interest there is clear.
  • There are genuine and sincerely-held ideological differences about the desirability of regulation, both regulation in general and particular kinds of regulation. Crudely, effective regulation means finding the right balance between the beliefs of the tree hugger and the beliefs of the free-market ideologue.
  • There is a fundamental strategic challenge involved in designing regulatory frameworks. In the abstract, one option is for the legislature to pass highly specific legislation that puts in place detailed regulations governing the minutiae of, for example, the operation of some industry. This can result in concrete results very quickly, but it can limit the ability of regulatory agencies to adapt to changing circumstances and to new technologies. The other option is to pass very broad legislation that merely sets rough objectives and empowers regulators to figure out how to achieve those objectives. This approach has the advantage of flexibility, but also puts a lot of power into the hands of unelected bureaucrats.
  • Nothing is free. All regulation involves trade-offs. Tighter environmental regulations can cost jobs. Gathering the data needed for effective consumer protection regulations can have implications for consumer privacy. Win-wins are few, and certainly not automatic.
  • Regulation is part of a political process. Regulators are part of the executive branch of government, and the executive branch relies upon the cooperation of the legislature (both to pass the relevant legislation and to provide regulators with funding). And even if we are optimistic about the dedication of our legislators to the public good, we have to remember that the key goal of politicians is to get and keep power. That inevitably has an impact on the way they facilitate, or frustrate, efforts at passing and enforcing regulations.

So, think about your favourite regulatory issue. Now re-read the list above. If you can think through each of those problems and solve them, well, after that getting the right regulation should be easy.

(Thanks to Duke’s Edward Balleisen for the invitation to attend this workshop.)

Who Else is Too Big to Fail?

The notion that some companies are “too big to fail” — too large and too interconnected with the rest of the economy for their failure to be permitted by government — is lamentably familiar to most of us in the wake of the 2007-2010 financial crisis. The term has most famously been applied to the biggest American banks (e.g., Bank of America) and insurance companies (e.g., AIG), and it motivated the multi-multi-billion-dollar government bailouts of 2008/2009. In some ways, it’s a radical notion: for most of modern economic history, the assumption has been that the economy could operate according to something like survival of the fittest. If a company is so mismanaged that it fails, so be it. That’s life in a competitive market. Of course, governments have from time to time propped up companies seen as particularly important employers, but such moves are always divisive. There has seldom been such widespread agreement that certain companies really are so big, and so important, that they cannot be allowed to fail.

But outside of the financial industry, what companies might reasonably be thought of as “too big to fail?” Are there companies the failure of which would be truly catastrophic? What companies are there such that, if they suddenly ceased operations, the result would be disastrous not just for individual customers, employees, and shareholders, but for society as a whole?

I’ll mention a few possibilities, and then open the floor for discussion:

BP, Chevron, and the other very large oil companies. As unpopular as they are, it’s hard to deny that their product is utterly essential, at least for the time being. Any one of the biggest companies going out of business would, I suspect, have a terrible impact on the reliability of supplies of gasoline and heating fuel, and would most certainly result in increased prices. On the other hand, most of the world’s oil supply flows through the big state-owned oil companies of the middle east, rather than through private companies like Exxon and Shell the others, the ones that come most readily to mind for North American and European consumers.

Big pharma. Again, not a popular industry. And much of what they produce — treatments for baldness, erectile dysfunction, etc. — is far from essential. But some of their more important products, including things like antibiotics and vaccines, truly are essential and an interruption in their supply could have catastrophic consequences, from a public health point of view. But then, that industry has enough players in it, with overlapping product lines, that it’s unlikely the collapse of any one company would have a huge impact. But really, I’m guessing here. Perhaps the collapse of the maker of whatever the single most antibiotic is would be catastrophic. (Does anyone know?)

What about UPS? That one may surprise you, but the company handles something over 5 million packages per day, which I’ve heard adds up to a non-trivial percentage of American GDP. If UPS disappeared tomorrow, of course, Fedex and the USPS would take up some of the slack, but the short-term effect on American business (and hence consumers) would be significant.

Locally, surely, there are lots of companies that might be considered essential. Companies involved in ensuring the quality of municipal water supplies might count (including the ones that provide the chemicals needed for water purification). And in places where fire departments are privately-run, those would obviously count. But really, I’m looking for examples of companies the failure or disappearance of which would have widespread effects from a social point of view.

Of course, the phrase “too big to fail” isn’t just descriptive. In the world of finance, it is seem as having immediate policy implications. In 2009, Alan Greenspan, the former chairman of the US Federal Reserve (and no fan of government intervention in the economy), said “If they’re too big to fail, they’re too big.” Are there companies outside of finance where such an argument could be made?

Unethical Innovation

Innovation is a hot topic these days, and has been an important buzzword in business for some time. As Simon Johnson and James Kwak point out in their book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, innovation is almost by definition taken to be a good thing. But, they also point out, it’s far from obvious that innovation is in fact always good. They focus especially on financial innovation, which they say has in at least some instances led to financial instruments that are too complex for purchasers to really understand. Innovation in the area of finance — often lionized as crucial to rendering markets more efficient and hence as a key driver of social wealth — is actually subject to ethical criticism, or at least caution. And the worry is not just that particular innovations in this area have been problematic. The worry is that the pace of innovation has made it hard for regulators, investors, and ratings agencies to keep up.

In what other cases is “innovation” bad, or at least suspect? One other example of an area in which innovation might be worrisome is in advertising. Consider the changes in advertising over the last 100 years. Not only have new media emerged, but so have new methods, new ways of grabbing consumers’ attention. Not all of those innovations have been benign. When innovative methods have been manipulative — subliminal advertising is a key example — they’ve been subject to ethical critique.

Some people would also add the design and manufacture of weaponry to the list. But then, almost all innovations by arms manufacturers have some legitimate use. Landmines and cluster bombs are controversial, largely because of their tendency to do too much “collateral dammage” (i.e., to kill civilians). But they do both have legitimate military uses. So it’s debatable whether the innovation, itself, is bad, instead of just the particular use of the innovation.

Are there other realms in which innovation, generally taken to be a good thing, is actually worrisome? One caveat: the challenge, here, is to point out problematic fields of innovation without merely sounding like a luddite.

Financial Speculation & Ethics

Friday I gave a talk as part of a terrific workshop on the ethics and law of financial speculation, held at the University of Montreal. (The event was co-sponsored by U of M’s Centre for Business Law and the Centre for Research in Ethics.)

As I mentioned in a posting last week, financial speculation is the subject of some controversy. Indeed, there has been plenty of discussion of regulating various forms of speculation, though whether that is possible and how best to do so is also subject to controversy.

Very roughly, “speculation” can be thought of as involving any of a range of forms of relatively high-risk investment. In a way, it is the exact opposite of a slow, safe investment such as buying government savings bonds. But it’s also different from pure gambling: in most forms of gambling, you have no reasonable expectation of making money. You might well win big, and it’s nice if you do, but really all you can expect is to have fun playing the game. Speculation on the other hand involves taking what are hopefully well-informed risks, in the hopes of exceptional returns.

Here are 3 stereotypical examples of speculation:

  • Imagine that a wheat farmer is considering whether to plant wheat an additional, previously-unplanted, field. Imagine that the farmer’s total cost for doing so would be $5/bushel of wheat. If the current price of wheat is hovering right around the $5 mark, that turns planting into a risky proposition. The risk of a loss might make planting just too unattractive. Now imagine a speculator comes along and is willing to take that risk, so she offers the farmer $5.25/bushel for the wheat that has not even been planted yet. With the promise of a modest-but-guaranteed profit in hand, the farmer plants the crop. If, at harvest time, the price of wheat has gone up to $6/bushel, the speculator stands to make a tidy profit. If the price has gone down to $4/bushel, the speculator suffers a loss — but she’s in the business of speculating precisely because she has the resources to absorb such losses, and will just hope that her next investment pays off better.
  • Imagine someone whose job is to invest in futures contracts on commodities such as oil or gold. A futures contract is basically a commitment to buy a specified quantity of something, at a specified price, at some date in the future. The example above involved a kind of futures contract, except in that example the investor actually did intend to buy and take possession of the farmer’s wheat once harvested. But in the vast majority of futures trading, nothing but paper ever changes hands. If a trader finds that other traders have been paying above-market prices for oil futures, she might decide that it’s worth buying some herself, in the hope that the price of oil will continue to go up because of this demand. Other traders are likely to notice, and imitate, her behaviour, with a net effect of pushing oil prices up. None of this needs to reflect any underlying change in consumer demand for oil, or any change in oil’s supply. It can all happen as the result of a combination of hunches about the future of oil and a dose of herd behaviour.
  • Imagine I have a dim view of the future prospects of a company, say BP, so I decide to “short” (sell short) shares in BP. What I do is I borrow some shares in BP, say an amount that would be worth $1,000 at today’s prices. I then sell those borrowed shares. If all goes as I expect it will, the price of BP shares may drop — let’s imagine it drops 25%. I can then buy enough shares in BP, at the reduced price ($750 total), to “return” the shares to the person I originally borrowed them from. And I get to pocket the $250 difference (minus any expenses). Basically, this form of speculation — short selling — is unlike standard investments in that it involves betting that a company’s shares will go down, rather than up, in value.

There is disagreement among experts regarding just what the net effect of speculation (or indeed of particular kinds of speculation) is likely to be. Some think that speculation, as a kind of artificial demand, has the tendency to increase prices and perhaps even to result in “bubbles” that eventually burst, with tragic results. But the evidence is unclear. In particular cases, it can be very difficult to tell whether a) speculation caused the inflationary bubble, or whether b) some underlying inflationary trend spurred speculation, or whether c) it was a bit of both. And even if it’s clear that some forms of speculation sometimes have such effects, it’s not clear a) that speculation has negative effects often enough to warrant intrusive regulations, or b) that regulators will be able to single out and regulate the most worrisome forms of speculation without stomping out the useful forms.

And defenders of speculation do point out that at least some forms of speculation have beneficial effects. Speculators of the sort described in my first example above take on risk that others are unable to bear, and hence allow productive activity to take place that otherwise might not. They also add “liquidity” to markets by increasing the number of willing buyers and sellers. Speculators, through their investments, can also bring information into the market and thus render it more efficient. When one or more speculators takes a special interest in a given commodity, it is likely to be on account of some special insight or analysis that suggests that there will be an increased need for that commodity in the future. In other words, in the best cases at least, expert financial speculation isn’t idle speculation — it is well-informed, and informative.

Of course, it’s also worth pointing out that pretty much any technology or technique can be used for good or for evil. The techniques of financial speculation can be used to attempt to manipulate markets or to defraud consumers. Whether the dangers of such uses outweigh other considerations is up for debate.

But from the point of view of ethics, it’s worth at least considering exercising caution in some areas. Perhaps speculators with a conscience, for example, should be particularly risk-averse when it comes to commodities that have a very direct impact on people’s wellbeing, such as food. Recently Andrew Oxlade, writing for the financial website “ThisIsMoney”, asked Is it ethical to invest in food prices? As Oxlade notes, at least some critics believe that recent surges in food commodity prices have at least something to do with the activities of traders engaging in speculative trades.

Oxlade offers this advice to investors:

To sleep easier at night and still get exposure to this area, you may want to consider investing in farming rather than in food prices via derivatives. In fact, your money may even do some good.

p.s. thanks once again to the organizers of the workshop mentioned above, namely professors Peter Dietsch and Stéphane Rousseau.
Note also: If you’re interested in this topic from a professional or academic point of view, then this book should be on your bookshelf: Finance Ethics: Critical Issues in Theory and Practice, edited by John Boatright.

Ethics and the Challenges of Scale

I’m currently attending the Global Ethics Summit in New York. In reality, despite its name, the GES is not just about ethics per se, but about ethics and legal compliance. Those of us who spend time thinking about corporate behaviour in terms of ethics are sometimes tempted to downplay the significance of legal compliance. After all, “compliance” just means “following the law,” and it’s tempting to think that following the law is a pretty low aspiration. After all, shouldn’t we be able to take for granted that companies will follow the law? Shouldn’t the real discussion be about the subtler ethical issues that pop up in areas not covered by law? The answer is not so clear, especially when we think about really big companies.

The first session I attended here yesterday got me thinking about the challenges of compliance, and the challenges faced by big companies precisely because of their scale. The panel was called “Compliance 2011: What’s Next?” and its members included representatives from three truly enormous companies: Kathleen Edmond, the Chief Ethics Officer for Best Buy; Odell Guyton, Director of Compliance for Microsoft; and Haydee Olinger, who is Vice President & Chief Compliance Officer for McDonald’s.

My thinking about scale was stimulated by two comments by panelists. First, Best Buy’s Kathleen Edmond mentioned that her company has over 170,000 employees. Just imagine the challenges that number implies for the people who are going to be held accountable for the company’s behaviour. Imagine being the mayor of a city with 170,000 citizens, and your job is to ensure that all of those citizens know about all the laws that apply to your city and its residents, and that none of those citizens ever breaks any of those laws. And add onto that the likelihood that you as mayor and your city as a whole will be held responsible for the bad behaviour of any of those citizens. Finally, imagine that the citizenry of your city has a yearly turnover rate of, say, 75% (Edmond said that Best Buy’s employee turnover rate is something between 60 and 70%, which she said is well below the retail industry’s average). That implies a tremendous challenge for education and enforcement.

The second comment of interest was from Haydee Olinger of McDonald’s. She pointed out that McDonald’s has “hundreds of thousands” of suppliers. And each of those suppliers is likely to have hundreds or maybe thousands of employees. That means that the quality and safety of McDonald’s product depends on the good behaviour of a lot of people. The same goes for keeping the fast-food giant out of legal trouble, because there are lots of ways in which McDonald’s could end up on the hook, legally, for problems the root causes of which lie with a supplier’s behaviour. The result is that an enormous amount of energy has to go into selecting those suppliers, teaching them about McDonald’s standards, and then enforcing those standards.

Now, we shouldn’t be fooled though into thinking that the problems unique to giant corporations amount to a criticism of such companies. Because the problem really lies with the amount of commerce done, rather than with the size of the organization that does it. If Best Buy’s 170,000 employees were instead employed by 170 companies, each with 1000 employees, there would still be a total of 170,000 potential wrongdoers. The only thing that would really change is that instead of one giant employer with a unified system for training those employees and monitoring them, you’d have 170 small businesses, each of which would likely struggle with figuring out the best way to do so. Likewise, consider the millions of burgers McDonald’s sells each year. If they were instead sold by a few thousand small burger joints, all those ingredients would still have to be bought from a massive number of suppliers. The difference would be that none of those small restaurants would be likely to have the resources required to screen, select, educate, and monitor those suppliers in any rigorous way. They’d probably just, you know, buy stuff from from them, and hope for the best.

So in terms of compliance, while size brings challenges, it also clearly brings advantages.

By the way, Best Buy’s Kathleen Edmond writes her own blog, which is well worth a look.

Critical Thinking in Business Ethics, Part 3: Fallacies

This is the 3rd in a series of occasional postings on the role of critical thinking in business ethics.Critical thinking is about a) how to construct good arguments, and b) how to spot and avoid bad ones. The focus of this posting will be on the latter. Bad arguments come in many forms, in many shapes and sizes. But some faulty arguments follow patterns of reasoning that are so common that they’ve acquired names. The general term for such named patterns of faulty argumentation is “fallacy”. There are many known fallacies, and textbooks on critical thinking typically devote a chapter to discussing a dozen or more of the most common ones.

Here are just a few examples of fallacies that could hinder good reasoning about Business Ethics.

One common fallacy is known as “the fallacy of composition.” We commit the fallacy of composition any time we assume, without justification, that the characteristics of the parts of a thing are automatically shared by the thing as a whole. A silly example: the fact that each piece of a motorcycle is light enough to lift doesn’t mean that the motorcycle as a whole is light enough to lift. Likewise, the fact that each member of a committee is talented and effective does not mean that the committee as a whole will be talented and effective — group dynamics matter. A business-ethics example follows pretty quickly from that one: from the fact that each member of your organization is ethical and well-intentioned, it does not follow that your organization, as a whole, will always act ethically. Team dynamics and institutional structure matter. That’s not to say that having ethical employees isn’t important. It obviously is. The point is just that you can’t automatically assume that, because you’ve got good employees, the net result of their behaviour will always be ethical. Another important example: from the fact that individual ethical acts don’t always pay, it doesn’t follow that an ethical pattern of behaviour won’t pay off in the long run.

Here are some other standard fallacies with clear relevance to business ethics. I’ll leave it to the reader to think up examples.

  • “Appeal to the Person” (a.k.a. ad hominem attack), which generally involves attacking the person putting forward a point of view, rather than examining the strengths and weaknesses of that person’s argument. It’s important to keep in mind that a well-reasoned argument from someone you don’t like is still a well-reasoned argument.
  • Appeal to Tradition“, which typically means using the fact that “we’ve always done things this way” as a reason for continuing to do things that way. Clearly a recipe for disaster.
  • Appeal to Popularity“, which involves appealing to the fact that a particular point of view or practice is popular as a reason in favour of that view or practice. But being widely-believed is of course a very poor indicator of whether or not a claim is actually true.
  • Straw man” argument, which involves setting up, and then knocking down, a weak or foolish-looking “dummy” version of your opponent’s argument. This is a common rhetorical device. Whenever someone criticizes a particular bit of regulation, for example, it’s easy (but wrong) to paint them as a “rabid free-market neoliberal,” and then to attack that ideology, rather than looking at the substance of their argument.

One of the reasons such fallacies are so dangerous is that they tend to be psychologically appealing. Sometimes they’re appealing because they play to our biases. And sometimes they’re appealing just because they act as short-cuts, letting us take the easy (i.e., lazy) route straight to a simple conclusion, without doing the hard work of actually looking critically at the case at hand. But in business ethics, what we really need are the best answers, not the easiest ones.
See also Part 1 and Part 2 in this series.

Credit Card Laws & Ethics

Credit cards: we love them, and we hate them. We love the convenience, but we hate the high interest rates. But really, based on our patterns of usage, it seems like the love/hate relationship is tilted in favour of love; it looks like our fondness for those super-convenient pieces of plastic is getting the better of us. The result: many North Americans are utterly buried under credit card debt. The natural temptation is to blame the banks, and certainly many financial institutions have preyed upon both our fondness of convenient purchasing, and our lack of attention to fine print, to turn credit cards into a cash cow.

But see this story, by Jennifer Liberto, for CNN Money: Credit card laws working, says bank critic

A year after new credit card laws curbed interest rate hikes and forced new disclosures, consumers are paying fewer late fees and have a better understanding of what their cards cost, according to a federal study released Tuesday.

White House official Elizabeth Warren, best known for her outspoken criticism of the banking industry, is expected to praise that same group during a Tuesday conference on the one-year anniversary of the credit card laws….

Now unless I’m mistaken, what banks are being force to disclose is stuff that would previously likely have been buried in the notorious ‘fine print’ of credit card agreements. And fine print is a hard problem, ethically. We all know that consumers should read the fine print; there can be important information there. But we also all know that almost nobody does read the fine print. Fairness requires at least some attention to what we can reasonably expect consumers to do. But on the other hand, is it really a bank’s fault if they disclose something important and you simply don’t bother to read it? While you could argue the fairness point back and forth, it’s also worth pointing out that there’s an economic efficiency argument here, too. Information asymmetries are the enemy of economic efficiency. (An “information situation” is any situations in which one party to a transaction understands that transaction much better than the other.) So we have here the foundation for an argument that says that, even if it is fair to expect consumers to read all the fine print, the fact that they do not do so is resulting in socially sub-optimal patterns of purchasing. This means a social reason, not just a paternalistic reason, to want to help consumers by forcing banks to change how it is that they disclose information.

The other interesting aspect of this story has to do with the persuasive force of law. According to Warren, “much of the industry has gone further than the law requires in curbing repricing and overlimit fees.” In other words, this may be a case in which the law not only prescribed a certain set of behaviours, but also set the tone for the industry. I think this aspect of law is too often overlooked. This suggests that even when we are skeptical about a new law because, for instance, we are skeptical about the potential for strict enforcement, we ought to consider the possibility that an industry will take the passage of a law as sending a signal about the overall tenor of society’s perspective on their business. We also ought to consider also the possibility that the law will give those subject to it an excuse to do what they thought they ought to be doing in the first place.

Sustainability is Unsustainable

I was tempted to call this blog entry “Sustainability is Stupid,” but I changed my mind because that’s needlessly inflammatory. And really, the problem isn’t that the concept itself is stupid, though certainly I’ve seen some stupid uses of the term. But the real problem is that it’s too broad for some purposes, too narrow for others, and just can’t bear the weight that many people want to put on it. The current focus on sustainability as summing up everything we want to know about doing the right thing in business is, for lack of a better word, unsustainable.

Anyway, I am tired of sustainability. And not just because, as Ad Age recently declared, it’s one of the most jargon-y words of the year. Which it is. But the problems go beyond that.

Here are just a few of the problems with sustainability:

1) Contrary to what you may have been led to believe, not everything unsustainable is bad. Oil is unsustainable, technically speaking. It will eventually get scarce, and eventually run out, for all intents and purposes. But it’s also a pretty nifty product. It works. It’s cheap. And it’s not going away soon. So producing it isn’t evil, and using it isn’t evil, even if (yes, yes) it would be better if we used less. Don’t get me wrong: I’m no fan of oil. It would be great if cars could run on something more plentiful and less polluting, like sunshine or water or wind. But in the meantime, oil is an absolutely essential commodity. Unsustainable, but quite useful.

2) There are ways for things to be bad other than being unsustainable. Cigarettes are a stupid, bad product. They’re addictive. They kill people. But are they sustainable? You bet. The tobacco industry has been going strong for a few hundred years now. If that’s not sustainability, I don’t know what is. To say that the tobacco industry isn’t sustainable is like saying the dinosaur way of life wasn’t sustainable because dinosaurs only ruled the earth for, like, a mere 150 million years. So, it’s a highly sustainable industry, but a bad one.

3) There’s no such thing as “sustainable” fish or “sustainable” forests or “sustainable” widgets, if by “sustainable” you mean as opposed to the other, “totally unsustainable” kind of fish or forests or widgets. It’s not a binary concept, but it gets sold as one. A fishery (or a forest or whatever) is either more or less sustainable. So to label something “sustainable” is almost always greenwash. Feels nice, but meaningless.

4) We’re still wayyyy unclear on what the word “sustainable” means. And I’m not talking about fine academic distinctions, here. I’m talking big picture. As in, what is the topic of discussion? For some people, for example, “sustainability” is clearly an environmental concept. As in, can we sustain producing X at the current rate without running out of X or out of the raw materials we need to make X? Or can we continue producing Y like this, given the obvious and unacceptable environmental damage it does? For others, though — well, for others, “sustainability” is about something much broader: something economic, environmental, and social. This fundamental distinction reduces dramatically the chances of having a meaningful conversation about this topic.

5) Many broad uses of the term “sustainable” are based on highly questionable empirical hypotheses. For example, some people seem to think that “sustainable” isn’t just an environmental notion because, after all, how can your business be sustainable if you don’t treat your workers well? And how can you sustain your place in the market if you don’t produce a high-quality product? Etc., etc. But of course, there are lots of examples of companies treating employees and customers and communities badly, and doing so quite successfully, over time-scales that make any claim that such practices are “unsustainable” manifestly silly. (See #2 above re the tobacco industry for an example.)

6) We have very, very little idea what is actually sustainable, environmentally or otherwise. Sure, there are clear cases. But for plenty of cases, the correct response to a claim of sustainability is simply “How do you know?” We know a fair bit, I think, about what kinds of practices tend to be more, rather than less, environmentally sustainable. But given the complexities of ecosystems, and the complexities of production processes and business supply chains, tracing all the implications of a particular product or process in order to declare it “sustainable” is very, very challenging. I conjecture that there are far, far more claims of “sustainability” than there are instances where the speaker knows what he or she is talking about.

7) Sometimes, it’s right to do the unsustainable thing. For example, would you kill the last breeding pair of an endangered species (say, bluefin tuna, before long) to feed a starving village, if that was your only way of doing so? I would. Sure, there’s room for disagreement, but I think I could provide a pretty good argument that in such a case, the exigencies of the immediate situation would be more weighty, morally, than the long-term consequences. Now, hopefully such terrible choices are few. But the point is simply to illustrate that sustainability is not some sort of over-arching value, some kind of trump card that always wins the hand.

8 ) The biggest, baddest problem with sustainability is that, like “CSR” and “accountability” and other hip bits of jargon, it’s a little wee box that people are trying to stuff full of every feel-good idea they ever hoped to apply to the world of business. So let’s get this straight: there are lots and lots of ways in which business can act rightly, or wrongly. And not all of them can be expressed in terms of the single notion of “sustainability.”

Now, look. Of course I don’t have anything against sustainability per se. I like the idea of running fisheries in a way that is more, rather than less, sustainable. I like the idea of sustainable agriculture (i.e., agriculture that does less, rather than more, long-term damage to the environment and uses up fewer, rather than more, natural resources). But let’s not pretend that sustainability is the only thing that matters, or that it’s the only word we need in our vocabulary when we want to talk about doing the right thing in business.

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