Archive for the ‘profits’ Category

Ethics of Profit, Part 3: The Profit Motive

3 coinsThis is the third in a 3-part series on the ethics of profit. (See also Part 1 and Part 2.) As mentioned in previous postings, we should distinguish between our ethical evaluation of profit per se (which, after all, just means financial “gain”), and our ethical evaluation of the profit motive. After all, I don’t worry at all that Big Pharma makes big profits — that just means that they make products that lots of people think are worth paying for — but I do have serious worries about what people inside the pharmaceutical industry are willing to do to maintain those profits.

But we should be cautious about jumping too quickly to criticize the profit motive, either in particular cases or as a force in the economy as a whole. Here are just a few points:

1) People often suspect the profit motive — or at least, excessive focus on the profit motive, in the form of greed — of being responsible for a lot of corporate wrong-doing. But, anecdotes aside, that intuitive hypothesis isn’t necessarily well-supported by the facts. I’ve mentioned previously a paper by philosopher Joseph Heath* that points out that there are problems with the theory that greed is the root cause of a lot of wrongdoing. Corporate crime is actually more often aimed at loss-avoidance than at profit-making. And it’s also worth noting that we see lots of white-collar crime occurring at the top of organizations, committed by people who are already rich and who hence have relatively little to gain in financial terms. As Joe points out, the criminological literature has long since discarded the notion that greed is the root of all (or even most) evil.

2) Despite the fact that the traditional corporate (and anti-corporate) rhetoric has focused on the significance of profits, it’s probably much more likely that corporations and the key decision-makers within them are moved by a much broader range of motives, including things like:

  • A desire to increase market share;
  • The desire to innovate;
  • The desire to create cool products;
  • Basic competitive drives to be (and prove yourself to be) bigger, stronger, faster, smarter, etc.;
  • The CEO’s desire to build his or her personal legacy;
  • etc.

Of course, each of those motives can almost certainly result in wrongdoing too. But that just reinforces the point that even if the profit motive causes trouble, it isn’t unique in that regard.

3) The profit motive, whatever else it may do, plays 2 absolutely essential roles in any modern economy. Economist Steven Horwitz points this out in his “Profit: Not Just a Motive”. One role (as Adam Smith pointed out) is the basic one of motivating productive activity. Now, Smith never said that the profit motive is the only thing that motivates people to engage in production and trade. But what he did say is that even someone who doesn’t happen to have much love for his or her fellow human being is liable to end up doing something productive, even if only because he or she wants to earn a living. The other role for the profit motive is more subtle, and has to do with information. As Horowitz puts it:

What critics of the profit motive almost never ask is how, in the absence of prices, profits, and other market institutions, producers will be able to know what to produce and how to produce it. The profit motive is a crucial part of a broader system that enables producers and consumers to share knowledge in ways that other systems do not.

4) The profit motive also plays an essential role in modern corporate governance. Most large corporations are “owned” (in a very loose sense) by shareholders, to whom corporate managers and directors owe a fiduciary duty. In particular, managers and directors are obligated to try to make a profit. (Note that, contrary to what many seem to think, there is no obligation to actually make a profit, and the need to make a profit is not, in fact, legally binding or overriding. Shareholders only ever get a profit after a number of other, legally-binding, obligations — such as the obligation to pay workers, to pay suppliers, to provide refunds for consumers who bought faulty products, etc. — are met.) The strong obligation to try to make a profit for shareholders provides focus for managers. Rather than being pulled in 20 different directions by 20 different stakeholders, corporate managers have in mind that, yes, they need to keep in mind various stakeholder obligations, but all of that has to be part of an overall plan aimed at shareholder profits. Many people believe that this imposes a kind of discipline on corporate executives, without which those executives would be free to feather their own beds, throw lavish parties for their favourite charities (not necessarily the most needy ones), hire under-qualified siblings for key roles, etc.

5) Getting rid of the profit motive would essentially mean abolishing private ownership. When we talk about “profit”, we’re typically talking about the money that flows from owning something. It might be the landlord’s profit (i.e., whatever’s left after costs are subtracted from rent) or the shareholder’s profit (i.e., the dividend that might be paid out on the shares he or she owns, if the corporation happens to make a profit). Abolishing the profit motive basically means and end to permitting individuals to own things. So why do critics of the profit motive so seldom (in the last, say, 4 decades) propose ending private ownership? Hmmm. As Joseph Heath put it in “Learning to love the Psychopath” [PDF] (a review of the movie, The Corporation), “If public ownership is not the solution, then private ownership cannot be the problem.”

6) Even if we could keep our attachment to private ownership and wish into existence more “positive” motives than the profit motive, it’s not clear that we would be better off. Even if large numbers of executives (and shareholders) could be convinced not to aim at profit, but instead to aim at things like charitable deeds or the public good or world peace, it’s not clear that that would solve the problems we are most worried about. Does anyone really think that fraud couldn’t be, or indeed hasn’t been, committed in the name of charity? Does anyone believe that lies haven’t been told and thefts committed in the name of the public good?

None of this is intended as a blanket endorsement of profit-seeking. It’s just a reminder that in our haste to criticize the profit motive, we ought not ignore important questions about just what role the profit motive plays, what current institutions do to transform a range of motives into a range of outcomes, and what alternative motives and institutions are available to us.

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*Joseph Heath, “Business Ethics & Moral Motivation: a Criminological Perspective,” Journal of Business Ethics 83:4, 2008. Here’s the abstract.

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.

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p.s. thanks once again to the organizers of the workshop mentioned above, namely professors Peter Dietsch and Stéphane Rousseau.
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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 of Shoe-Shine Pricing

A few days ago at the airport I stopped to have my shoes shined professionally, something I rarely do. The service was excellent. The guy doing the work was pleasant and knowledgeable, and the results were beautiful. The price, revealed at the end of the process: $6.75. I gave the guy a ten, and told him to keep the change. Now, that’s not exactly enough to make me think I’m a big spender, but it’s pretty good, percentage-wise (nearly a 50% tip). The guy sitting next to me did the same thing, by the way, and I’m betting that’s actually a pretty common pattern.

This got me thinking about the relationship between pricing, tipping, and currency denominations. If the price of the shoe-shine were $8.00, most people likely would still give the guy the same $10, resulting in a substantially smaller tip. But if the price were closer to $5, I bet most people would pull out a $5 bill and then looked for some change to add as a tip. So whoever sets the basic price for the shoe-shine has enormous power to influence the size of tips.

Now, the guy who shined my shoes was wearing a shirt bearing the logo of a chain of shoe care-and-repair stores, so I’m guessing he wasn’t setting his own prices. This implies that the company he works for, in addition to making a decision about his base pay, is also, through its pricing policies, making a decision that likely has an even bigger impact on his income. Of course, that decision is not entirely unrestricted. The company in question has to cover its costs. But presumably it has different pricing strategies open to it. Crudely, it can set prices high, which will likely keep demand down but will result in a big per-sale profit margin; or the company can set its prices low, and rely on volume. Either strategy might make economic sense. If (and that might be a big “if”) both strategies have the potential to work out equally well for the company, that means the choice is open, and the potential is there to base pricing on whichever strategy will do the most for employees in terms of providing customers an incentive for large tips.

(Another example: any bar manager that sets the price of a beer at $4.50 is pretty much ensuring that wait-staff are going to get lousy tips — the temptation for many people is going to be to plunk $5 onto the bar, resulting in a tip of 50 cents or 11%.)

But the factual foundation of this question, beyond my own anecdote, is all speculation on my part. I’ve never had a job where I relied on tips. Can anyone shed any light on the relevant facts, here? And does anyone know whether incentivizing tipping is something companies ever take into consideration in their pricing decisions?

Ethics of Profit, Part 2: Profits Unjustly Gained

This is the second in a 3-part series on the ethics of profit.

As I noted in the first in this series, profit is often subject to ethical criticism. But the reasons for that are not clear. To begin our analysis, we need to distinguish between the ethical evaluation of profit itself, and the ethical evaluation of the profit motive. The first 2 parts in this series are focused on profits per se. The next one will focus on the profit motive.

Our focus last day was on unjustly large profits. Today’s focus is on profits that are gained unjustly, regardless of the size of those profits.

There are several distinct circumstances in which profits might be said (by at least some people) to have been unjustly gained.

  1. Profits gained through exploitation. Under this heading, we might include the profits earned by drug companies that jack up the prices for life-saving drugs, or profits earned by tow-truck operators who cruise the highways during snowstorms, offering to rescue stranded motorists at exaggerated prices. I’ve blogged before about exploitation, and in particular about how hard it is to define. The big problem is that, generally, situations that get called “exploitative” involve none of the usual factors that make transactions unethical, factors like force, fraud, or deception. When we say that profits have been gained through “exploitation,” we typically mean that the situation in which such profits were earned were — in some vague way — unfair, but it is notoriously difficult to say just what is unfair about them.
  2. Profiting from vice. Under this heading, we might include profiting from legal sale of tobacco, alcohol, pornography, and sexual services. Many people think one or more of these ways of making a living are morally suspect. We might want to distinguish among different cases, however, including based on factors such as choice and information and power. The janitor at a cigarett company, for example, might be held less blameworthy than the company’s lawyers and advertising executives.. We might also include, under the general heading “profiting from vice,” things like doing business with bloodthirsty dictators.
  3. Profits from financial speculation. This one may strike some as odd. But there is a long history of suspicion with regard to those who engage in financial speculation, including especially things like short selling (which involves betting that the price of a stock will fall). After all, the speculator is essentially a gambler, and the sense that many people have is that such gambling is of no social value: speculators don’t build things, after all. And there are worries that speculators contribute to the growth of dangerous market bubbles. But defenders of speculation argue that speculators, unlike gamblers, do have beneficial effects. They add liquidity to markets, and their speculation, made visible by their investments, adds valuable information to the market.
  4. Unethical business practices. Here we have what is potentially an enormous grab-bag of business practices that constitute legal, but unethical, ways to make a profit. I tend to agree with Joseph Heath’s view*, that we should delineate the boundaries of this category in terms of what Heath calls (socially) “non-preferred competitive strategies”. Heath’s idea is basically that agressive competitive behaviour on the part of companies is generally a good thing (when, e.g., they compete by innovating and by seeking efficiencies), but their behaviour becomes fundamentally anti-social when they compete by using strategies that tend to make markets work worse overall (i.e., make markets less able to perform their social function of increasing social well-being). So the “forbidden” strategies here would include any attempt to profit from information asymmetries (e.g., by misleading customers), externalities (e.g., pollution) or monopoly. Profits gained in those ways may rightly be criticized.

We might add to this list the gaining of profit by individuals or institutions that we think ought, for various reasons, not make profits at all. For some people, at least, that includes government agencies and public universities.

Are there other ways in which profits (even small profits) can be unethical, ways that don’t fit into one of the categories above?

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*Heath’s argument about non-preferred competitive strategies can be found in his paper, “Business Ethics Without Stakeholders,” Business Ethics Quarterly, 2006 (Vol. 16, No.3).

Ethics of Profit, Part 1: Excessive Profits

This is the first of a 3-part series on the ethics of profit.

Is making a profit ethically good, or bad, or neutral? Or, better still, are there situations in which making a profit is either good, or bad, or neutral?

Profit is often the subject of criticism. The film, “The Corporation”, has as its main target not corporations per se, but the profit motive in particular. Michael Moore appears in the film, saying that while some corporations do good things, “The problem comes in, in the profit motivation here, because these people, there’s no such thing as enough.”

Now, the idea of profit is often tied up with money, with ‘filthy lucre.’ After all, everyone knows that saying about money being the root of all evil. But in the abstract, profit needn’t be defined in terms of cash. In the abstract, profit is just the “cooperative surplus” that results from a mutually-beneficial exchange. When I buy an apple (for, let’s say, $1) at my local market, both the owner of the market and I end up better off. We both “profit.” My own “profit” is the amount by which I value the apple over the $1 that I paid for it. And the market owner’s profit is the amount by which the sale price of $1 exceeds her own costs (apple + labour + overhead, etc.). And the fact that we both profit from the exchange is precisely what makes the exchange good for both of us.

Now, I think we need to distinguish between our ethical evaluation of profit, and our ethical evaluation of the profit motive. Because even if we agree that profit is generally OK, we can still worry about the things that people (or companies) will do in the pursuit of profit.

I’ll focus another day on the profit motive. Today I want to focus on profit itself. It seems to me that there are 2 kinds of circumstances in which profit itself is subjected (rightly or wrongly) to ethical criticism. One is when profits are excessively large; the other is when profit is gained unjustly. Today I’ll focus solely on the idea of excessive profit.

Several industries are commonly singled out as having unjustly large profits. One is the banking industry. Another is the pharmaceutical industry. Likewise, if we expand the category of “profit” to include individual profit in the form of salaries, then Wall Street is regularly singled out as a place where excessive profits are to be had. The fundamental ethical question with regard to large profits is what philosophers would call a question of “distributive justice.” Basically, is it fair that some people have so much money, while others in the world have so little?

A few points are worth making about big profits:

1) It’s worth remembering that very large corporate profits don’t necessarily translate into large amounts of personal wealth for anybody. Consider the fact that a company that has several billion dollars in profits — a lot of money, by anyone’s accounting — might have hundreds of millions of shares outstanding, spread across thousands (or even millions) of shareholders, and might pay out only a tiny dividend (say, a dollar per share). So a massive profit doesn’t necessarily translate into massive personal wealth for anyone.

2) Although many of us have intuitions that say that large disparities in wealth are unjust, it has proven incredibly difficult to translate those intuitions into anything like a coherent ethical theory. Despite our best efforts, we simply have no sound explanation of a) why it is that differences in wealth (fairly acquired) ought to be considered unfair, or b) just how large a difference has to be in order to be considered unfair. The lack of such a theory doesn’t negate our intuitions, but it should give us pause before we assert that particular disparities are “obviously” or “grossly” unethical.

3) It’s worth noting that what I referred to above as our “intuition” about injustice might also be referred to as a form of envy. And envy is far from admirable. As philosopher Anthony Flew once pointed out*, “this envy which resents that others too should gain, and maybe gain more than us, must be accounted much nastier than any supposed ‘intrinsic selfishness’ of straight self-interest.”

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*Anthony Flew, “The Profit Motive,” Ethics, Vol. 86, No. 4 (Jul., 1976), pp. 312-322
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Update: Part 2 of this series is here and Part 3 is here.

Should Celebrities Regret Singing for Gadhafi’s Family?

I blogged nearly two weeks ago about the Ethics of Doing Business in Libya. The concern there was about the ethics of involvement in Libya by, well, “businesses” in the traditional, i.e., corporate, sense of that word. But the controversy that emerged short after that, and that continues still, concerns high-profile members of the entertainment business — celebrities like Usher, 50 Cent, and Mariah Carey. Basically, it has come to light that a whole fistful of such stars have, at various times, done private concerts for members of the Gadhafi family. And now, in light of the continuing violence in Libya, most of those stars are expressing regret and doing things like donating the money to charity. (For details, see Public consequences of pop stars’ private gigs, by By Reed Johnson and Rick Rojas for the Los Angeles Times.)

A few people have pointed out that the timing of the celebs’ crisis of conscience is just a little bit off. Libya has been a dictatorship for decades, and its leader has been a vicious madman just as long. As Tim Cavanaugh wrote on his blog at Reason, “Even assuming Qaddafi is so toxic you can’t with sound conscience take his dinars, that didn’t just become the case a few weeks ago.” If it’s right to give the money back now, it was likely wrong to take it in the first place.

But we can also question whether anyone does, or should, give much of a hoot over where these celebs sing, or for whom. The LA Times quotes Sting — a star with a reputation for charity work and activism — as defending having sung for the daughter of Uzbekistan dictator Islam Karimov:

Sting addressed criticism saying he was “well aware of the Uzbek president’s appalling reputation in the field of human rights as well as the environment. I made the decision to play there in spite of that.” He added, “I have come to believe that cultural boycotts are not only pointless gestures, they are counterproductive, where proscribed states are further robbed of the open commerce of ideas and art and as a result become even more closed, paranoid and insular.”

The man has a point. Though it may sound like a self-interested argument, that doesn’t mean it’s a bad one.

(Cavanaugh’s blog entry has a wonderful quote from, of all people, Adolf Hitler, who shrugged off artists behaving in ways that might have taken by him to be treasonous: “I don’t take any of that seriously. We should never judge artists by their political views. The imagination they need for their work deprives them of the ability to think in realistic terms.”)

But this leads me wonder: just what is the objection to singers singing for dictators? Is the money the problem, or is it having sung for (or more generally having done business with, or having provided a service for) an evil man’s family? Consider: if the money really is the problem — i.e., if this really is a case of filthy lucre — then donating the money to charity really does utterly absolve the stars in question of any blame. Or at least it would if the timing weren’t so questionable. Singing for free would also be OK. Indeed, if the money is all that matters, then stars might have a positive obligation to sing for wealthy tyrants and give the money to charity. After all, what could be better than squeezing a few million out of a mad dictator’s family in order to do something good with it? And if singing for free (or singing for money and donating it to charity) isn’t OK, then that seems to imply that the money isn’t the problem either.

Utility Monopolies: Who Pays for Mistakes?

Naturally, when any organization suffers unanticipated expenses, it’s going to have to find ways to make up the shortfall in its budget. That’s exactly what happened to Ontario Power Generation (OPG), the provincially-owned power company responsible for generating about 70% of all the power consumed in the Canadian province of Ontario. A legal battle with customers ended up costing the company nearly $20 million. So, where did the company turn to recoup that amount? Well, to its customers, of course.

Here’s the story, via the CBC: Ont. electricity rates expected to rise next week

Electricity ratepayers in Ontario, already reeling from soaring prices, should brace for more increases.

The Ontario Energy Board agreed Tuesday to let utilities raise rates to recover $18 million they paid in fines and legal costs after charging consumers excessive interest on late payments….

Now most companies could only dream of passing along such costs to their customers. Some might even succeed. But most wouldn’t. Most would be hindered by the fact that, if they raise the prices they charge to customers, customers would simply buy from someone else. But electricity in Ontario (as in most places) is a monopoly: an organization called Hydro One has a monopoly on distribution of electricity throughout Ontario, and the power it distributes is produced by a small handful of organizations, the most significant of which by far is OPG. So, with the consent of the Ontario Energy Board (the relevant regulatory agency) all OPG has to do is raise its prices, and the company’s customers end up paying for the consequences of its legal tussle with…the company’s customers.

I don’t know much about the original lawsuit, but I do know that this was a predictable result of it. And that puts customers of utilities in a strange position. Sure, customers can sue the a utility when they screw up, but all the utility is going to do is turn around and raise your rates to get the money back out of you.

Now, just to be clear, I generally have nothing against this sort of monopoly. Electricity distribution is what economists call a “natural monopoly.” It’s crazy to have multiple competing sets of power lines running down to street. And, for that matter, it might well be crazy to let many multiple competing companies all run nuclear power plants (OPG runs several of those). But at any rate, it’s worth recognizing the effect that this monopoly (or quasi-monopoly) situation has in the event that the company screws up (say, by overcharging customers). The expenses incurred are entirely likely simply to be passed along to their captive customers.

By the way, Ontario Power Generation (whose only shareholder is the government of Ontario) had a profit of $333 million for the 4th quarter of 2010.

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Thanks to NW for the story.

HuffPo, AOL and the Ethics of Unpaid Labour

AOL bought the Huffington Post this week. Now, many of HuffPo’s volunteer bloggers are up in arms, accusing the left-leaning news-and-aggregation site of two related crimes: selling out to a (presumably) evil corporate media giant, and failing to share the wealth with thousands of volunteer bloggers who, over the years, have contributed probably millions of words to HuffPo’s archive of content.

But criticism was not limited to the volunteer bloggers themselves. Tim Rutton, of the LA Times, wrote:

To grasp its business model, though, you need to picture a galley rowed by slaves and commanded by pirates….

Adbusters — the slightly-past-its-best-before-date organization whose sole purpose is to bash capitalism and consumerism — put it this way:

Socialite Arianna Huffington built a blog-empire on the backs of thousands of citizen journalists. She exploited our idealism and let us labor under the illusion that the Huffington Post was different, independent and leftist. Now she’s cashed in and three thousand indie bloggers find themselves working for a megacorp….

On the face of it, this sounds like a strong criticism. Use unpaid labour to build a truly massive (and profitable) online presence. Keep that unpaid labour in the fold by espousing values they believe in. And then sell out for hundreds of millions to a corporation that almost certainly could not care less about the aforementioned values. It really does sound tantamount to slavery, with a touch of ideological treason thrown in for good measure. But to understand this better, we need to know a little more about the economics of blogging. As a good starting point, see this piece by stats guru Nate Silver: The Economics of Blogging and The Huffington Post

The fact is, however, that sentiments like [the LA Times’s] Mr. Rutten’s reflect a misunderstanding of The Huffington Post’s business model. Although The Huffington Post does not pay those who volunteer to write blogs for it, this content represents only a small share of its traffic. And, to put it bluntly, many of those blog posts aren’t worth very much….

Silver goes on to be much more specific, calculating the likely dollar value of the contribution of the average volunteer HuffPo Blogger.

The point is that for something over 99% of bloggers, blogging is a hobby. The contribution of most HuffPo bloggers to the website’s success is minimal. Those thousands of volunteer bloggers on whose “backs” HuffPo was supposedly built were likely more important as audience than as generators of content. Should the volunteer bloggers feel jilted? I’m reminded of a commercial from a few years back, in which a mom consoles her 8-year-old boy whose team just lost a game of soccer or hockey or something. “Did you try your hardest?”, asks the mom. “And did you have a good time? That’s all that really matters.”

Of course, if the volunteer bloggers are worried about the integrity of HuffPo’s editorial voice, you would think they would be somewhat consoled by the fact that Arianna Huffington is retaining the reins in that regard, and in fact will be gaining the key editorial role at AOL as a whole. But then, that’s reason why the rest of us should be deeply concerned, given Huffington’s penchant for featuring dangerously bad pieces related to things like healthcare, including some that are the intellectual equivalent of evolution denial.

Ethics & Corporate Taxes

How much tax do corporations pay? Ask most people and I’m guessing they’ll say “not enough.” But seriously, how many people know what the actual corporate tax rate is? And then complicating things, there are the loopholes, those little tricks o’ the accounting trade that — as “everyone knows” — allows most big companies to pay next to nothing. Right?

For insight into these questions, see this useful piece by David Leonhardt, for the NY Times: The Paradox of Corporate Taxes.

OK, so a few answers. In the US, the federal corporate tax rate is 35%. (For comparison: in Japan it’s just over 40%, in Germany it’s 29.8%, and in Canada it’s 16.5%. In Ireland it’s just 12.5%.) So, on an international scale, the US corporate tax rate is actually fairly high. (For more, see Taxes Around the World.)

What about those loopholes? Sure enough, there are American companies that manage to dodge almost all taxes. The most egregious examples are from the cruise-line industry. As the NYT story points out, Carnival Cruise Lines is a prime example:

Over the last five years, the company has paid total corporate taxes — federal, state, local and foreign — equal to only 1.1 percent of its cumulative $11.3 billion in profits. Thanks to an obscure loophole in the tax code, Carnival can legally avoid most taxes.

That’s an extreme case, but lots of other companies manage to avoid paying anything close to the full 35% too. According to the NYT:

Over the last five years, on the other hand, Boeing paid a total tax rate of just 4.5 percent, …. Southwest Airlines paid 6.3 percent. … Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.

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What’s more surprising, though, is how much tax corporations pay, in total, on average:

The average total tax rate for the 500 companies [in Standard & Poor’s stock index] over the last five years — again, including federal, state, local and foreign corporate taxes — was 32.8 percent.

So while some corporations pay very little tax, there’s also considerable variation.

From an ethical point of view, is this situation fair? Do corporations, in general, pay enough? Too much?On the face of it, that’s a basic issue of distributive justice: is 35% (or some fraction of that, after deductions) the right share of the overall tax burden for corporations (as opposed to individuals) to bear? That’s obviously a big question.

Fundamentally, corporations are a conduit, facilitating the flow of cash from consumers to employees and investors. To some, this implies a fundamental criticism of current patterns of taxation in the corporate world. Such critics point out that there’s a sense in which the money that flows through corporations is taxed twice: corporate profits are taxed, and then any dividend (i.e., a portion of after-tax profit) that is payed out to shareholders is taxed, too. In principle (as far as I can see) the same could be said about the money paid out to employees in the form of salaries (though the tax on profits is paid on the amount left over after expenses, including salaries, are paid). To the extent that I understand it, this criticism seems odd to me: after all, money flows around (and around and around) the economy, and is taxed at various points along the way (and is then injected back into the economy, of course, in the form of government spending). The point is that we (via government) levy taxes at specific points in this flow, and at specific rates, based on whether we want to encourage or discourage particular behaviours. If you tax a behaviour, then, other things being equal, people will do less of it. And if you offer a tax deduction for y, you are encouraging people to do more of it. We tax at various points in the corporate “process”, if you will, in order to encourage or discourage particular activities like investment. So in a sense, there is no “corporate share” of the tax burden — there’s just the question of whether various taxes and deductions operating in the corporate world broadly understood are effective in achieving our goals. (Although there is a question of justice regarding any difference in the way dividends are taxed as opposed to employment income.)

But again, back to the issue of loopholes as a way of reducing a corporation’s tax burden. Now, it’s worth considering the point of loopholes, from a public policy point of view. In some cases, at least, “loophole” is just the pejorative term for a tax exemption or deduction that a government has put in place to encourage or deter certain kinds of behaviour: deductions for investments in equipment or buildings are an example of this. But you don’t have to be either a tax lawyer or even a keen observer of politics to guess that some such mechanisms are astute ways for government to mould the economy, whereas others are almost certainly boondoggles resulting from savvy corporate lobbying. Then, of course, there’s also the question of gaming the system. A particular incentive (or loophole) might have been put in place for sound public-policy reasons, yet be abused by corporations as a way of dodging taxes (say, by investing in new equipment in order to reap a tax benefit and then selling the equipment off as soon as it can within the letter of the law). The most obvious ethical litmus test here is the “intent-of-the-law” test. It is prima facie unethical to misuse a tax deduction that is intended to be socially beneficial in a manner that is cynically aimed at simply minimizing corporate tax burden.

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p.s., I’m not an accountant or tax lawyer. If anyone with relevant expertise can correct any of the factual assumptions above, please do help out. Thanks.

Glock Pistols, Ethics and CSR

It’s been a week now since the Tuscon, Arizona killings in which Jared Lee Loughner apparently emptied the high-capacity magazine of his 9 mm pistol.

Plenty has already been written about the awful killing. Inevitably, some of it has focused on the weapon he carried, namely the Glock. According to Wikipedia’s Glock page,

The Glock is a series of semi-automatic pistols designed and produced by Glock Ges.m.b.H., located in Deutsch-Wagram, Austria.

Despite initial resistance from the market to accept a “plastic gun” due to concerns about their durability and reliability, Glock pistols have become the company’s most profitable line of products, commanding 65% of the market share of handguns for United States law enforcement agencies[5] as well as supplying numerous national armed forces and security agencies worldwide….

If you want to learn more about the company that made the pistol Loughner used, see this article, by Paul M. Barrett for Bloomberg Businessweek, Glock: America’s Gun

…Headquartered in Deutsch-Wagram, Austria, the company says it now commands 65 percent of the American law enforcement market, including the FBI and Drug Enforcement Administration. It also controls a healthy share of the overall $1 billion U.S. handgun market, according to analysis of production and excise tax data. (Precise figures aren’t available because Glock and several large rivals, including Beretta and Sig Sauer, are privately held.) ….

Barrett’s article provides a fascinating account of the invention of the Glock pistol and how it came to its current dominant market position through a combination of excellent engineering, good marketing and cagey lobbying.

The sale of semi-automatic pistols with high-capacity magazines is a good example of an issue where the term “corporate social responsibility” provides a useful analytic lens. I’ve argued here before that the term “CSR” is over-used — we shouldn’t try to stuff every single ethical issue into the relatively narrow notion of corporate social responsibility. But like the BP oil spill, the current case raises issues that are genuinely social in nature. As difficult as it may be, set aside for a moment the tragic events of January 8th, and look at the marketing of the Glock pistol (and its accessories) from a social point of view.

Do Americans as individuals have the right to buy certain kinds of weapons? As a matter of constitutional law, yes. And there’s arguably no direct line to be drawn between the sale of an individual gun and a particular wrongful death (because there’s always the complicating factor of the decision made by the individual who bought the gun and then pulled the trigger). So let us take as given (even if just for the sake of argument) that there’s nothing intrinsically wrong with making and selling guns to the public. Let us assume that individual customers have a legitimate interest in owning semi-automatic pistols, and there’s nothing unethical about a company seeking to make money from satisfying the demand for this entirely-legal product.

That still leaves as an open question, I think, the question of social impact. The best rationale for public acceptance of the kind of zealous, profit-seeking behaviour seen in the world of business lies in the social benefits that arise from a vigorous competitive marketplace. This implies that the moral limits on business are also to be found in a business’s net social impact.

There is a raging debate, in the US, over the net social impact of the sale of handguns. And where a product is contentious, you can argue that “the tie goes to the runner,” and that the “runner” in this case is freedom. When in doubt, opt for freedom of sale and choice. So let’s say (again, if only for sake of argument) that there’s nothing wrong with selling handguns to the public. So Glock (the company) is justified in existing and in carrying out its business. That still leaves open the question of the particular ways in which handguns and their accessories are marketed. The social benefits of selling handguns may be fundamentally contentious; in other words, reasonable people can agree to disagree. But I doubt that the same can really be said for marketing moves designed, for example, to foster the sale of high-capacity magazines (ones that hold 33 bullets instead of the usual 17).

I’m not presuming to answer that question here; I’m merely pointing out the significance, and appropriateness, of a specifically social lens.

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(See also Andrew Potter’s characteristically sane piece on the politics of gun control: ‘You can’t outsmart crazy’—or can you?)

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