Economics and Ethics

What’s a Class B-Corporation?

Jonathan B. Wight

When asked about their plans after graduation, many of my students say they want to work for government or non-profits. "That is soooo 20^th century," I say. Instead, consider the market alternative!

The growing 21^st century wave, I think, is to be part of the for-profit sector, using entrepreneurial skills to create new products and services that make society better. The for-profit sector is sustainable without requiring the benevolence of strangers or the coercion of big brother. Many companies provide meaningful work and desirable social and environmental outcomes, using the price signals within markets to guide resource allocations.

The for-profit sector just got a boost in Virginia with the creation of a new type of business designation—the Benefit Corporation. A Benefit Corp has the legal right—and the obligation—to consider a multitude of stakeholders including workers, suppliers, customers and the community.

The Benefit Corps has a mandate to make profits within the context of the community and envisioned social mission. This is far more attractive for many young people whose moral imaginations have rightly been aroused. Robert Frank has found that many students are willing to accept 30% below market wages in order to work for a company with a strong social or environmental mission.

Benefit corporation laws have been enacted in 7 states (California, Hawaii, Maryland, Virginia, New Jersey, New York, and Vermont) with others in progress. The main advantage is that if a Benefit Corp is sold, the founders are not required to sell to the highest bidder, but can instead sell to the bidder who most closely can carry out the multiple missions. Removed is the fear of minority shareholder law suits.

A related but entirely separate concept is a "Certified" B-Corp. Certification is provided by B Lab, a non-profit organization "dedicated to using the power of business to address the world's most pressing challenges." B Lab ensures that companies that market themselves as green and social are actually living up to that pledge. A recent company to be certified is Patagonia; Yvon Chouinard, the founder, stated that:

"I hope five or ten years from now we'll look back on this day and say this was the start of a revolution, because the existing paradigm isn't working anymore. This is the future."

So far B-Corp companies are a tiny fraction of the market, 532 businesses with combined revenues of $3 billion.

I can hear the cynics, moaning that all this blather about social responsibility is simply a marketing gimmick. I don't doubt that this is so for many companies who want to market themselves as green.

Adam Smith's moral sentiments model helps explain why motives to help society and the environment can be authentic, not calculated. For more on this, read my critique of Friedman's claim that only profits should matter to a firm. Briefly: Friedman's concept relies on a duty-bound manager who puts shareholder interests first. But a duty-bound person cannot turn duty on-and-off. There's the rub. Transformational leadership connects people's morals to their work in an authentic way, not to manipulate but to engage.

And that is why Benefit Corporations (and the B-Corps designation) can help companies clarify and carry out their missions within a capitalist system.

Memorial Day

Jonathan B. Wight

Our veterans have left their limbs on the battlefield. Now that they are back their unemployment rates sometimes rise much higher than the national averages, especially for the under-24 year old segment.

The Bureau of Labor Statistics reports that while veterans as a group have about the same unemployment rate as Americans overall (about 8.3 percent), Gulf War Era II veterans (since 2001) averaged nearly 50 percent higher unemployment rates—12.1 percent in 2011. Still more startling and disturbing is the data showing that male veterans under the age of 24 had unemployment rates of 29 percent in 2011!

There are many reasons for this, including the epidemic of post-traumatic stress disorders (PTSD). It's easy to underrate these emotional disorders. We were raised on a diet of John Wayne shooting up the bad guys and sleeping soundly. Clint Eastwood growls "Go ahead, make my day…" as he blows someone away.

That's all fantasy, at least for most well-adjusted people. The shock of danger, injury, and pain is real and long-lasting. There are no good treatment regimens.

Veterans2Work is one of the many non-profits and other groups attempting to re-integrate veterans into the workforce. John Reynolds, the founder of Veterans2Work, is a Viet Nam vet whose current passion is demonstrating to businesses how valuable service members can be to for-profit organizations. A key part of the story is that veterans develop virtuous habits, which carry over into their civilian jobs.

Reynolds was one of several veterans honored at the White House yesterday for his work.

Thanks to all our service members.

Smith on Top

Jonathan B. Wight

Oh the fickleness of surveys. In the early 1970s, no one was thinking of Adam Smith. Kenneth Boulding quipped, tongue-in-cheek, "[W]ho needs Adam Smith?"

The meteoric resurgence of Adam Smith's reputation began after 1975. The reasons for it are complex and worthy of elaboration, which I did in "The Rise of Adam Smith" (2002).

A recent survey of economists found that among members of twelve economic associations, the favorite pre-20^th century economist was overwhelmingly Adam Smith. Smith won more than twice as many votes as the runner up, David Ricardo.

The Union of Radical Political Economists (URPE), however, gave as many votes to Karl Marx as it did to Smith. The Society for the Development of Austrian Economics (SDAE) gave an equal vote to Carl Menger.

Overall it was a romp for the Scot, winning a majority of the votes.

Smith the wordsmith satisfies diverse tastes. Jacob Viner noted that "[A]n economist must have peculiar theories indeed who cannot quote from The Wealth of Nations to support his special purposes." Smith's genius was in constructing layers of analysis that give philosophers material to ponder for decades and centuries.

No.	%	Favorite Economist
221	56%	Adam Smith
106	27%	David Ricardo
67	17%	Alfred Marshall
394	100%	Total

The Ethics of Consumer Ratings

Jonathan B. Wight

My wife and I just returned from a delightful road trip to the Shenandoah Valley of Virginia (see below). We stayed at two B&Bs that we loved.

But is that reason enough to give them high rating on Trip Advisor or others sites?

I used Trip Advisor to plan my stays and found their reviews quite helpful. Lots of nice people took the time to honestly report and make life easier for me. Should I reciprocate?

This is a Prisoner's Dilemma. If I report honestly on these lovely B&Bs others will want to go stay there. The future availability of rooms will fall and the price will rise! I'm penalized for fair reporting. In the near term I'd be better off giving them a bad report.

But in the long run lying is bad for me and others. Because of false reports, good B&Bs will go out of business. In addition, as more false reviews get posted, trust in the rating system collapses and fewer people will bother reporting. Hence, I will lose a future source of good information. Based on consequentialist ethics, I should report honestly so as to gain the cooperation of others for mutual long run benefit.

But that consequentialist calculation, while on target, doesn't really explain why people fairly recount their experiences. There's a better and more reliable reason to report honestly—my moral sentiments! I have affinity with the entrepreneurs who buck the odds to start a small business and succeed. My senses of benevolence and justice require me to leave a good report if appropriate. My sense of resentment requires me to report a bad stay, hoping the owner corrects the problems or goes under. Virtue ethics can be a more reliable market partner than consequentialist ethics alone.

Facebook, Revisited

Jonathan B. Wight

It is way too soon to call, but I can't help gloating just a bit.

A week ago, in reference to the upcoming IPO of Facebook, I noted that irrational exuberance was on the loose. I predicted that "I'll be surprised if secondary investors, and perhaps even some initial investors, don't take a bath."

The stock hit a high on Friday of $42.50 and had fallen to $32 by early this morning, a drop of about 25%. Yikes! While individuals may be irrational at times, it is reassuring to see the market rein it in.

NPR Listeners Are Brainier

Jonathan B. Wight

A recent survey by Fairleigh Dickinson University's "Public Mind" finds a notable gap between where people get their news and what they know about current events. Not surprisingly, NPR listeners scored highest on a set of four international and five domestic questions.

Fox News listeners answered correctly only one out of four international questions, and only one out of five domestic questions. People who watched no news scored higher. The questions ranged from upheaval in the Middle East to the unemployment rate in the U.S. NPR listeners got about twice as many answers correct (still not great scores).

Liberals often claim that public radio and public TV should be supported with tax funds because these stations provide positive externalities to society. This survey could support that conclusion. Of course, only correlation has been established, not causality. People who listen to NPR are likely better educated and wealthier than the average citizen.

Still, this kind of investigation is significant for what it reveals about the education of adults—and the lack of accountability in some media outlets. A related question is, do some adults even want to know the right answers? Ideology may be a more satisfactory media purchase than truth. Hence, there is no guarantee that competitive markets will generate more truth if consumers want to buy falsehoods. That may be the key concern raised by this study.

UPDATE (5/25/2012): James Fallows offers some interesting criticisms and caveats about the survey. I think the main criticism is the one mentioned above, that education and income levels are not being controlled for.

Forum on Michael Sandel, markets, and morality at the Boston Review

Mark D. White

Thanks to Jennifer A. Baker, I can bring you this link to a marvelous forum in the Boston Review on the relationship between markets and morality, leading off with an essay from Michael Sandel based on the argument in his recent book, What Money Can't Buy: The Moral Limits of Markets. The other participants include some very heavy hitters: Richard Sennet, Matt Welch, Anita Allen, Debra Satz, Herb Gintis, Lew Daly, Sam Bowles, Elizabeth Anderson, and John Tomasi.

 

Worse Than It Looks

Jonathan B. Wight

Thomas Mann and Norman Ornstein have been getting the cold shoulder: no Sunday TV show will put them on after they criticized Republicans for being largely to blame for political gridlock and they attacked the media for being complicit and complacent.

Their book is called, It's Even Worse Than It Looks: How the American Constitutional System Collided With the New Politics of Extremism (Basic Books).

In a recent op-ed, the authors stated:

"The GOP has become an insurgent outlier in American politics. It is ideologically extreme; scornful of compromise; unmoved by conventional understanding of facts, evidence and science; and dismissive of the legitimacy of its political opposition."

This description usually fits a monopoly, which can be scornful of the consumer and ignorant of innovation. Not surprisingly, competition has been effectively eliminated from most House races through gerrymandering.

Still, one would think television producers invite guests based on whether they expected the guest to draw the largest viewing audience. Controversy sells. Would tv producers really boycott these authors out of spite?

Being Rich Makes You Less Ethical?

Jonathan B. Wight

The Proceedings of the National Academy of Sciences (PNAS) recently published a study entitled "Higher social class predicts increased unethical behavior."

The authors claim to have found in various experiments that those with "Greater resources, freedom, and independence from others among the upper class give rise to self-focused social cognitive tendencies (3–7), which .. will facilitate unethical behavior…. [T]he recent economic crisis has been attributed in part to the unethical actions of the wealthy."

This supports Adam Smith's view, which is that the poor are more ethical because they are constrained by income and wealth to be so: they have little room for error. The rich, according to Smith, can get away with more and do so.

But Deirdre McCloskey and Benjamin Friedman, among many others, have reached a different conclusion: that the rise of general prosperity leads to an enhanced sense of moral imagination, and the improvement in the ethical climate measured by trust and by the enhancement of rights of individuals.

Perhaps the paradox can be resolved by admitting that rises in absolute income and that of relative income have different effects, including on morality. Lots more work to do here.

The Wrong Side of History

Jonathan B. Wight

The Republican governor of Virginia, Bob McDonnell, was once considered a contender for the vice-presidency. That was before his party handed him a hot potato in the form of a new law requiring ultra-sound tests before legal abortions could be performed.

Now McDonnell is trying to gain traction with the more centrist part of the electorate by "evolving" his view on gay rights. While previously he questioned whether gay judicial candidates could serve while violating Virginia's sodomy laws, McDonnell now says the issue is irrelevant. Judges should be "merit-based selections solely based on a person's skill, ability, fairness, judicial temperament."

McDonnell's first executive order as governor was to assert no discrimination in hiring on the basis of sexual orientation. He forgot to tell his Republican colleagues, who today rejected a gay prosecutor for a judgeship after he had been endorsed by bi-partisan judicial selection committees.

McDonnell, to his credit, seems to be sincere in pushing for equality in hiring. BUT! If gays are valuable members of the military and the judiciary and the business community—if they meritoriously can fly a fighter jet and sentence others to death and hire and fire workers, all activities requiring great intellectual and moral virtues—it boggles the mind that McDonnell and others continue to assert that gay people should not be allowed to adopt children or enjoy other normal marital rights and responsibilities.

This is unconscionable, and akin to Virginia's notorious anti-miscegenation law that was over-thrown by the Supreme Court in 1967.

Irony abounds—the Commonwealth's state motto is "Virginia is for lovers."

UPDATE (5/15/12): Today's Richmond Times-Dispatch, libertarian on many social issues, weighs in: "The House Republicans' insistence on spiking a gay nominee – who is raising children in a stable relationship – because of his stance on a single issue unrelated to the post he is being named to shows an appalling lack of judgment and decency." Indeed.