On the social responsibility of business

As countries get wealthier, the citizenry has more time to forget how economic well-being and rising living standards are actually created.   Prosperity is not a natural human condition. In fact, the reverse is true. But when too many people think wealth is a natural state, they believe exercising their political imperatives, for example agitating for entitlements, benefits, hand-outs, redistribution to favoured interests and cronies, constraints on the freedoms of others, has no opportunity cost. When business leaders indulge publicly in such idealism, it becomes even more dangerous. In many businesses today, we observe social responsibility objectives affecting business decisions. What is deemed to be socially responsible, of course, varies by political persuasion. These actions are not costless.

Milton Friedman explained the social responsibility of business in an article published in 1970 by the New York Times Magazine. It is worth every minute of reading time. It should be read and re-read by captains of industry and students alike.  I re-print it here in its entirety:

 

The Social Responsibility of Business is to Increase its Profits

by Milton Friedman

The New York Times Magazine, September 13, 1970. Copyright @ 1970 by The New York Times Company.

When I hear businessmen speak eloquently about the “social responsibilities of business in a free-enterprise system,” I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free en­terprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing em­ployment, eliminating discrimination, avoid­ing pollution and whatever else may be the catchwords of the contemporary crop of re­formers. In fact they are–or would be if they or anyone else took them seriously–preach­ing pure and unadulterated socialism. Busi­nessmen who talk this way are unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.

The discussions of the “social responsibili­ties of business” are notable for their analytical looseness and lack of rigor. What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom. Continue reading

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Corporate tax rate

The topic of the month is the rate of corporate tax in Australia.  When it comes to discussing the rate, two points are worth concentrating on. Firstly, the rate of tax does not reflect the tax burden on the economy. The true tax burden is measured by Government expenditure. Tax rates determine how the incidence of that tax is shared around and over what time periods. Reducing the tax rate will not reduce the tax burden. Secondly, the rate of tax is very important to potential overseas investors who weigh up the marginal costs of a project against the marginal gains. If tax rates are reducing in other countries, then Australia will attract less foreign investment, and that is bad for the economy, bad for people and our living standards will fall.

So it is important than both the rate of tax is reduced and Government expenditure is reduced. Both are necessary.

The best way for businesses to make a positive contribution to society

Businesses have a social obligation? Laurence D. Fink is wrong about that. Mr Fink, head of investment firm Blackrock, has drafted a letter to business CEOs due to be delivered this week, according to widespread business press reporting. Strangely, Mr Fink has shared his draft with the media in advance – that is genuinely a puzzle partly because it makes public a fundamental misunderstanding. If the reporting is correct, then Mr Fink plans to tell the CEOs of businesses that Blackrock may invest in that their firms need to contribute to society: “To prosper overtime, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”

What does he mean by a positive contribution to society? There is clearly an implication that he thinks businesses that deliver financial performance are not necessarily making a positive contribution to society. Who does he think should decide what represents a positive contribution? By what means should such judgement be put into practice? Therein lies the obvious inconsistency in this tired old mantra. As an aside, this mantra is old and tired. It is nearly 50 years ago that Milton Friedman published a piece on this very topic. Mr Fink may think he is delivering a new message, but he’s not.

Put simply, businesses make a positive contribution to society, as judged by society, when they make profits. It is only when making profits that businesses are making effective use of scarce resources. By making a profit, a business is adding value to the mix of inputs of raw materials, land , labour and capital and the output is valued more highly by consumers. If a business is making a loss, then the output is not valued by consumers to the same extent as some alternative purposes to which the inputs could be employed. Nothing further than a profit is needed to demonstrate a positive contribution to society.

Now, if someone argues that “their” view of what constitutes a positive contribution to society differs in some way, then the obvious questions are a) what makes your view any better or worse than anyone else’s view? b) in what way should business activity change to satisfy your view? and c) who will pay for that different activity? Enforcing any action upon business activity owing to a perceived will to better society is inherently an attack on personal freedom. It is simply another means of gaining and exploiting political power: controlling or inhibiting the behaviour of some people and taking their economic resources away in doing so, typically by enforcing higher consumer prices or lower shareholder returns.

Businesses are not moral entities. They do not have obligations. Contrary to what some people believe, the don’t even pay tax. Only people pay tax and only people have moral obligations. We have political institutions that are formed, more or less, along democratic grounds, that make laws that constrain the behaviour of people. Company managers, agents as they are of the shareholders, who believe that they must contribute to society by doing anything other than make profits, are attempting to exert political power. In doing so, they are acting in breach of their obligations to their shareholders and almost certainly, making a negative, not positive, contribution to society.

 

The failure of financial services regulation

As we get into 2018, the financial services regulations continue to grow. Government, and by extension the agencies of government, intervene in the day to day running of financial services firms like never before. The core driving principle behind the relentless command and control approach is the desire of all governments, of all political colours, to assume power over all individuals and remove their self-reliance. This drive is endemic across all areas of government – the nanny state is a useful descriptor. It is not unique to Australia but happening throughout the western world.

The history of regulation of financial services in Australia has followed broad themes over the years since the second world war and the unsuccessful attempt by the Chifley led Labor Government to nationalise the banking sector. Since then, the broad themes have been solvency management, consumer disclosure, management scrutiny and consumer needs assessment. Continue reading

Self steering, upwind – the easiest point of sail

Sailing close-hauled upwind is the point of sail most easily balanced.

This photo shows me upwind in a gentle breeze.

 

IMG_7257

 

The wheel is held up just a fraction to push the boat downwind and held there by shock cord. Meanwhile, the mainsail is close-hauled but then eased a fraction. The rudder is not steering enough to overcome the main wanting to push the boat up until the main approaches luffing. Then, as the main loses power, the rudder takes over until the main catches more wind and pushes her up again.

A continuous series of S bends results. The finer the trim, the shallower the S bends, For this to work, the main needs to luff just before the jib would, hence the main is eased a fraction.

This boat will sail indefinitely like this. Until it hits the shore. Don’t fall overboard – the boat will sail away from you.

To fix bad bank behaviour, the banks must be deregulated. Royal commissions are pointless.

The Royal Commission inquiry into the banks and other financial institutions of Australia was described by the Prime Minister, as he announced his decision to instigate it, as “regrettable”. He said it had become “inevitable”. He also said that Government policy remained policy “until it is changed.” Only the Government can initiate a Royal Commission. So how was it inevitable? If it is regrettable, then why hold it? Continue reading

Actual vs expected

One of the actuarial profession’s valuable contributions to the management of long term financial risks in the field of life insurance has been the development of credible models of human mortality. The humble life table.  Over the years (going back several hundred), the techniques have resulted in this fundamental component of fair and equitable pricing and reserving for mortality risk. The table’s contribution to the welfare and advancement of people has been important. But have these techniques been forgotten or ignored by climate change zealots?

The actuary is pragmatic. Theoretical mathematical models of mortality have been developed but they have only ever been able of giving a guiding picture. Human mortality patterns do not slavishly follow a mathematical model. The established method of updating life tables has been to periodically collect data about deaths and recalculate the rates of mortality then re-graduate the raw results into a credible and smooth table. Continue reading

Peak oil?

I have always been interested in cars. Ever since I was a youngster, I was climbing into, out of, on and around my parents’ cars. Going for a drive out into the country roads was a treat, and roads that wound their way through the glens of Antrim, between narrow hedgerows, or up to a high spot to look over the sea to Scotland were a favourite. I tinkered in the garage, held spanners and fetched things for the men. I was driving before I could see properly over the dashboard and before I could reach the pedals to fully depress the clutch without sliding down in the seat to reach it. I drove on backroads at night, when other car lights could be seen at some distance, giving enough time to quickly swap seats with an indulgent parent in case the passing car may contain a police officer. Police officers are not known for their humour or indulgence when having stopped a vehicle they peer in through the driver’s window to find a 10 year old.

Continue reading