Archive for the ‘markets’ Category
Like it or not, we are in the middle of a social networking revolution. And of course, that’s hardly news. Endless ink, digital and otherwise, has been spent on worrying over whether Facebook, Twitter, and their rapidly-multiplying ilk are the best or the worst thing that has ever happened to humankind.
A recent story about car-pooling apps highlights the fact modern technology, including social media, has a role to play in making markets more efficient. And since efficient markets are generally a good thing, this counts as a big checkmark in the “plus” column of our calculations concerning the net benefit of social media.
Carpooling is a great example, because the relative lack of carpooling today is a clear instance of what economists call “market failure” — a situation in which markets fail efficiently to provide a mutually-beneficial outcome. Think of it this way. There are lots of people in need of a ride. And there are lots of people with rides to offer. The problem is a lack of information (who is going my way, at what time?) and lack of trust (is that guy a potential serial killer?) Social networking promises to resolve both of those problems, first by helping people coordinate and second by using various mechanisms to make sure that everyone participating is more or less trustworthy.
With regard to car-pooling, the obvious benefits are environmental. But the positive effect here is quite general: just about any time we find a way to foster mutually-advantageous market exchanges, we’ve done something unambiguously good. This is one example of the ethical power of social media.
Another big enemy of efficient markets is monopoly power, or more generally any situation in which a buyer or seller is able to exert “market power,” essentially a situation in which some market actor enjoys a relative lack of competition and hence has the ability to throw its weight around. Social media promises improvements here, too. Sites like Groupon.com allow individuals to aggregate in ways that give them substantial bargaining power.
The general lesson here is that markets thrive on information. Indeed, economists’ formal models for efficient markets assume that all participants have full knowledge — that is, they assume that lack of information will never be an issue. Social networks are providing increasingly sophisticated mechanisms for aggregating, sharing, and filtering information, including important information about what consumers want, about what companies have to offer, and so on. So while a lot of attention has been paid to the sense in which social media are “bringing us together,” the real payoff may lie in the way social media render markets more efficient.
A recent story in the NY Times provides some encouraging anecdotes about companies that are moving to take greater responsibility for recycling. Companies like Starbucks and Coca-Cola, for instance, are finding new — and in some cases profitable — ways to take responsibility for the waste that their product packaging generally becomes. More recycling generally means less waste, less energy used, and less pollution.
Waste and pollution are business-ethics topics about which there is some room for agreement between the moralist and the economist. The moralist points out that it’s unfair to make innocent bystanders suffer the ill effects of your factory’s pollution. The economist points out that market inefficiency can result when costs, financial or otherwise, are not internalized (i.e., when costs are instead imposed on innocent third parties).
But an economically-savvy point of view must also recognize that there is in fact a socially-efficient level of waste and pollution, and that that level is not zero. Waste and pollution could only be driven to zero by shutting down industry (of all kinds) altogether, and that would have disastrous effects. In other words, we would have to sacrifice things we care about, like the ability to raise world-wide standards of living, in order to reduce pollution and waste to zero.
Consider this analogy: economists likewise sometimes argue, rightly I think, that there is an efficient level of crime. The methods by which crime could be driven to zero are both enormously invasive and enormously costly. It is not efficient — not a good use of resources — to drive crime to zero, even if we think it technically possible.
So waste and pollution, we might say, are always bad, but not always wrong. They are features of a system the overall productivity of which is an enormous boon to humankind. It would be crazy to say that gains in productivity must be sought at any cost, but it is likewise crazy to value anything else (e.g., the environment) so highly that it drowns out all considerations of efficiency.
Now none of this tells us about whether particular efforts at waste reduction or pollution abatement are good or bad. But it helps frame the issue. What we’re looking for is the right level of pollution and waste, and that level is not zero. It is also likely to shift over time, as affluence grows and technology evolves, and as companies like Coke and Starbucks and a thousand anonymous start-ups find new ways to make environmental protection efficient, in the broadest, most ethically-significant sense of the word.
A recent story quotes Fred Green, the CEO of the Canadian Pacific Railway, as saying that he won’t sacrifice safety in pursuit of profits. In his words, he won’t violate the terms of his company’s unwritten ‘social licence’ to operate.
The notion of a ‘social licence to operate’ reflects the notion that in order for a business to be successful, in the long run, the support and goodwill of society is essential. This includes everything from the willingness of a local community to walk into your store to buy things, to the willingness of neighbours to put up with the noise of your trucks driving past, to the willingness of duly elected representatives of the people to pass the kinds of legislation that makes modern commerce possible.
This raises the question: just how does a company earn, and maintain, its social licence to operate? How, in other words, can — or should — a business show its gratitude, or pay its debt to society?
There are a number of ways, and they are not mutually exclusive.
One option is through charitable donations. Corporate philanthropy is as old as the hills, but is generally pooh-poohed by proponents of modern CSR, who favour instead things like collaborative efforts to build local skills and capacity.
Another way is by paying special attention to social impacts, beyond what is required by law. For example: selling junk food is perfectly legal, and arguably fully ethical, at least on a case-by-case basis. But a food seller that looks to the aggregate social consequences of its junk-food sales, and tries to mitigate negative impacts, might be said to be doing so as part of its social licence to operate.
Another way is by paying its taxes. That might seem trivial, a mere matter of following the law. But given the complexity of the tax code, the number of loopholes, and the size of some companies’ accounting departments, a commitment to paying your fair share is probably non-trivial.
Another way a company can earn and keep its social license to operate is by a commitment to looking for ‘win-wins.’ In this category, we could place various efforts at seeking energy efficiency and waste reduction. Of the many ways a company can look to save money, some are socially valuable, and opting to pursue those over others might be seen as supportive of a company’s social licence.
And finally, there’s the old (and true) point made by Milton Friedman years ago, which is that companies contribute socially by making goods and services that people want. What does Merck ‘give back?’ It gives us pharmaceuticals that relieve pain and suffering. What does BP contribute? It finds and refines the oil without which our economy would literally grind to a halt. What does my local coffee shop do for the community? It provides a place to get in out of the rain, have a cup of coffee, and chat with a friend.
Now it’s quite likely that no one of these is sufficient. Each of them is a plus, and counts towards a company’s social licence, but likely some combination is necessary. From this range of options, each company chooses how it thinks it can best earn and keep its social licence to operate. Different mixes will make sense for different companies in different industries. There’s no one right combination that will let a company merit its social licence. Innovation and variety are a good thing, here. Let a hundred flowers blossom!
Sometimes it takes a really minor story to illuminate the basic issues at stake in business ethics. Like, for instance, a recent story about a guy selling both ice cream and serious street drugs out of his New York city ice cream truck. Here’s the story, by Jonathan Allen for Reuters: Ice cream vendor gets prison for selling drugs with treats.
That story highlights nicely one of three really fundamental questions that must be asked by anyone seriously interested in business ethics.
The three big questions of business ethics are as follows:
- 1) What may I do, and what may I not do, in attempting to make a living?
- 2) In what ways do my obligations change when I act on behalf of others, including employers, shareholders, etc.?
- 3) What should I do when I see inappropriate business practices that don’t directly affect me?
Each of these “big” questions can of course be subdivided into an entire category of questions. Question 1, for instance, implies a whole range of more specific questions — not just questions about the basic ethics of commerce (Can I lie, cheat or steal? No. Can I exaggerate, or put important details in fine print? Not so clear!) but also questions about Corporate Social Responsibility and corporate philanthropy. The second question covers all the issues that crop up once businesses are staffed by more than a single individual. And the third concerns third-party critique, the work of consumer advocates, and government regulation.
The news story cited above illustrates beautifully Question 1, the question of what you can and cannot do to make a dollar. Louis Scala was, after all, just trying to make a living. There’s nothing wrong with that, of course. The catch was the method he chose.
Scala chose to sell two products. One was soft-serve ice cream, a dessert treat sold primarily to kids, who just can’t get enough of the stuff. The other was OxyContin, a highly-addictive narcotic, sold primarily to adults who just can’t get enough of the stuff. Selling the former is considered a reputable way to make a living. Selling the latter (out of the back of a truck!) is what earned Mr. Scala three and a half years in jail. But then, neither of those products is uncontroversial. Ice cream isn’t exactly healthfood, and child obesity rates are on the rise. But on the other hand, it’s a harmless treat, when consumed in moderation. But on the other hand, it’s not always consumed in moderation. But on the other hand…you get the point.
Figuring out what constitutes a legitimate way to make a living — taking into consideration all reasonable details — is far from straightforward. But realizing that the questions we want to ask about business ethics all fall under one or another of the fundamental headings listed above is, I think, a useful bit of mental bookkeeping, which is increasingly important in a world where criticisms, and defences, of business practices are becoming more and more diverse.
There’s oil, and then there’s oil. Right? Or is there only, you know, oil? Does it matter, ethically, where the oil we consume comes from?
That issue has arisen very recently and caused a minor diplomatic dust-storm: a Canadian ad offering a moral critique of Saudi Arabian oil specifically has apparently offended the Saudis, who have asked that the ads be taken off the air.
See this summary, by John Terauds for the Toronto Star: Canadian ethical oil ad stirs Saudi ire
A Canadian-made television ad that speaks out against oil imported from Saudi Arabia has raised the ire of the Middle Eastern nation, prompting it to send a threatening legal notice to broadcaster CTV.
The 30-second ad, produced by Toronto-based ethicaloil.org, focuses on discrimination against women in the conservative Muslim country….
But the ad in question isn’t just anti-Saudi oil; it’s a defence, by means of contrast, of good ol’ Canadian oil, derived primarily from the oilands (a.k.a. tarsands) of Alberta. Yes, the same oilsands that have themselves generated so much criticism on environmental grounds. Now it’s certainly not the first time someone has been accused of greenwashing the tarsands. But to slam Saudi oil as unethical in order to proclaim tarsands the ‘ethical alternative’ really does strain credulity.
Now the critique of Saudi oil isn’t entirely without merit. Saudi cultural standards for the status and treatment of women are ethically indefensible. But the “ethical oil” claim for the oilsands is a serious stretch, at least if it’s supposed to point to a bright and clear difference not just in particular ethically-salient characteristics, but in overall ethical goodness.
In principle, we could look at this as a matter of “choose your poison.” Do you want the oil that’s associated with human rights violations, or the oil that’s associated with environmental destruction? Interesting dilemma, in principle. But for most of us, it’s a moot point: oil (and the gas that comes from it) is an undifferentiated commodity, and we don’t get to choose based on nation-of-origin. So it’s not like the ad in question is really intended to help consumers make more ethical consumption choices.
More likely, what the group behind the ad is doing is the rhetorical equivalent of fracking, injecting the novel term “ethical oil” into existing debates over the oilsands, not because the term actually makes any sense, but simply in the hopes of stirring something up.
Update: Take a hew poll on this topic, here: Oil Poll: Human Rights or Environment?
I blogged yesterday about the importance of sound government and rule of law as a background condition for ethical corporate behaviour. Here in Canada (as in most other developed economies) we grumble about our government and our system of regulation, but we’re actually relatively lucky that way, by world standards. Our economy is thriving (quarter-to-quarter hiccups aside) in large part because businesses here have the luxury of doing what they do against a background of generally-stable government and generally-sane regulations.
But that’s not to say that there isn’t room for improvement. One key area in need of (constant?) improvement is food policy. It’s an incredibly complex area, with an enormous range of interests at stake and a huge range of values at play. Public policy is, as a result, pretty messy. For more details, see this new report by the Conference Board of Canada’s Centre for Food in Canada (CFIC). Here’s a summary, from Better Farming: Canada’s food policy system overloaded: report
Out of date policies, laws and regulations as well as conflicting government involvement stymie innovation and economic growth in the country’s food sector says Conference Board of Canada report…
(You can download the report here.)
Economic growth in the food sector isn’t of direct relevance to consumers (though it is of direct relevance to those employed in the sector). But consumers still have plenty of reason to care about food policy. All questions of food policy have a more or less direct impact on the health and/or pocketbooks of consumers; and hence all questions of food policy raise ethical issues (many of which I’ve blogged about). For example, according to the BF story:
The report reviews the Canadian approach to food regulation based on a study of six issues: food additives, genetically modified foods, health benefit claims, country-of-origin labeling, inspection, and international trade. [hyperlinks added]
Industry, of course, has a role to play in helping to reform regulation in this area. But in doing so, industry must think especially carefully about its ethical obligations. Normally, the slogan “Play by the Rules!” sums up the lion’s share of a company’s obligations. But when the issue at hand involves figuring out what the rules — i.e., regulations — should be, industry needs to consider very carefully the full ethical weight of the notion of “corporate citizenship,” and remember that a citizen is someone who participates in policy debates with an eye not just to their own interests, but to the public good as well.
Thanks to Prof. Richard Leblanc for bringing the CFIC report to my attention.
This is the second in an occasional series on the relationship between ethics and economics.
Today’s topic is the market. ‘The market’ isn’t anything magical. It’s just the term we use for the abstract entity that is the aggregate of all actual markets for particular goods — the sum total of the market for cars plus the market for poetry plus the market for pedicures and so on. Seen another way, the market is just a whole bunch of people (and organizations) buying and selling stuff from and to each other.
The market is ethically significant. And in general, that significance is positive: markets are generally morally good. There is an ethical justification for markets, such that, with some exceptions for particular goods, where markets do not exist we wish they did.
Reasonably-free markets have three basic moral virtues. One is freedom. In a free market, each of us is free to buy whatever we want, within the limits of our ability to pay. That’s not the only kind of freedom anyone could hope for. The sense in which everyone is “free” to buy whatever model of car they want is not very compelling for those who cannot afford a car at all. But scarcity is a basic fact about the world, and the freedom to make one’s own choices within the confines of such scarcity is hardly trivial.
The second virtue of free markets is efficiency. For very many goods, reasonably-free markets are not just one way to provide those goods: a reasonably-free market is the most efficient way to provide those goods. I’ll have more to say about efficiency in a later instalment in this series. But very briefly, we can begin to understand efficiency as a moral value if we consider its opposite, namely inefficiency. Inefficiency means wastefulness, or getting fewer outputs from more inputs. Almost no one is in favour of inefficiency. And in a world where many people see their basic needs go unmet, inefficiency is a great evil.
The third great virtue of the market is its ability, famously described by Adam Smith, to turn self-interested behaviour on the part of one person into (reasonably) good outcomes for others. Smith’s point wasn’t that people are selfish, nor that they should be. His point was that everything you own, everything around you, exists because someone made it. And chances are that — hand-made gifts aside — they made it for you not because they love you, but because they needed to make a living. The market turns my needs into a way of satisfying yours, and vice versa. And it generally happens without someone putting a gun to our heads to make it happen.
But markets also have moral failings. One is the very lack of coordination that I referred to as “freedom” above. That lack of coordination means that markets are notoriously bad at providing for the production of genuinely useful public goods, like highways and lighthouses and police forces and so on. For such goods, it’s much more effective to have some central authority, preferably with coercive powers, collect taxes in order to build them.
Markets are also much better at providing what people want than it is at providing what they genuinely need. So markets produce junk food and video games and porn in abundance, but relatively little delicious health-food and educational games and poetry. Of course, in casting the former as “bad” products and the latter as “good” ones, I’m merely appealing to popular stereotypes. In reality, there’s very little rationale for thinking video games are better than poetry. That’s just an elitist bias. But still, it probably is fair to say that there are products that are out-and-out socially bad: it’s no great bragging point for the market that it has brought us so many brands of cigarettes, for example. So if — and this is a very big if — we were much more certain, and much more unanimous, than we are about what things are genuinely good in life, then it might make a lot more sense just to have governments direct the making and provision of those things.
One of the key starting points for any sane consideration of issues in business ethics is the realization that the market serves a moral purpose. It’s an imperfect mechanism, to be sure, but its value for promoting human freedom and wellbeing is such that what we ought to think in terms of balancing various market virtues and vices against each other, rather than thinking in terms of the market as an alternative to important human values.