Q: You embody a form of capitalism and entrepreneurship without romance. Where does that come from?
A: I believe that the DNA of a business is to provide to its constituents. Customers come No. 1; No. 2 are employees; and somewhere in there are the shareholders. You who started it, you’re last.
When you try and shift a business’s true purpose and say that it’s going to save society, you will fail. Not some of the time—100 percent of the time. Saving baby whales is not what businesses do. I teach a lot of graduating cohorts of engineers and business students, and this is the primary debate we have. When you go out into the world, if you think your job is to solve all of society’s problems, you will get fired.
This is from Nick Gillespie, “Kevin O’Leary Puts His Money Where the Profits Are,” Reason, January 2020.
I posted on this interview back in August.
This reminded me of a small way I learned the O’Leary lesson when I was about 10. My brother, Paul, who was about 13, had bought some golf clubs and decided to play at the 9-hole golf course near our summer cottage. He hired me as his caddy. In retrospect, I’m guessing that he did it to help me out and have a companion as he golfed. On one of the holes, we saw a golfer looking for his ball and I wanted to help him find it. So I put the clubs down and walked around in the rough, feeling for the ball with my feet. Paul got upset and told me that I was working for him and he wanted to continue playing. But I looked a little longer before going back to caddying for Paul.
When we came home, Paul complained to our mom (“mum” in Canada) and I thought she would take my side because we had been taught to be considerate of others. She surprised me. She said that because I was working for Paul, I didn’t have the right to help someone else when Paul wanted me to continue caddying for him. That was a hard lesson, but I got it.
READER COMMENTS
Mike Carey
Dec 14 2019 at 3:01pm
In order for strangers to cooperate (i.e., shareholders), it is important for them to either avoid trying to save baby whales, or to make damn sure that all the shareholders want to save baby whales.
But certainly there is more than one model, right? What about a family business? Is it wrong for a family to operate a business and use that as an opportunity to provide special work opportunities to their children (in addition to income)?
What about something like Patagonia? Is it wrong for people who share common ideals to work (or invest) together in a way they can be (more ) confident is consistent with those ideals.
It is one thing to say that the O’Leary model has a place, and value. It is quite another to say it is the only game in town.
Jon Murphy
Dec 14 2019 at 3:46pm
Ah, the complicated nature of duty!
AJ
Dec 14 2019 at 6:52pm
Saying you don’t “have the right” to help someone else out in this situation is an odd statement. Perhaps it wasn’t appropriate, but not having “the right” to do it doesn’t make sense.
David Henderson
Dec 14 2019 at 10:36pm
It’s true that I had the right to breach a contract. But it was a breach.
Phil H
Dec 15 2019 at 5:01am
I think this is right, and it highlights the amoral nature of business, and why it’s normal therefore for a society to regulate business (through the law).
There’s also a difficult grey area, in that if a fellow golfer was having a heart attack, the right thing to do would be to stop and help them. Normally that’s not an issue, because the employer and employee would both agree on that point. But there will arise cases where reasonable people make different judgments on whether to stop and help (or do any other action not in one’s job description), and that’s where the law or some other mechanism must step in.
john hare
Dec 15 2019 at 5:50am
It’s not even slightly amoral for a business to require employees to do the job they are being paid to do. Employees that don’t do their job can destroy a business. What is amoral is to use government force in the form of regulations to make people breach their contracts. A business destroyed contributes nothing to society.
Phil H
Dec 15 2019 at 11:22am
When I say “amoral”, I’m using it in the slightly technical sense of “not having anything to do with morality”. I don’t mean immoral, i.e. against morality.
David Henderson
Dec 15 2019 at 10:09am
Are you seriously suggesting that the legal system could have solved this? Do you have any sense of the costs of going to court or calling a cop or whatever you suggest the legal system should do?
Phil H
Dec 15 2019 at 11:19am
Hi, David. Nope, not seriously suggesting that, which is why I didn’t say it!
Jon Murphy
Dec 15 2019 at 10:24am
It’s not amoral. It’s perfectly moral. It’s mundane morality, yes, but morality all the same.
You make the very mistake I lecture on (and indeed have a post here on Econlog) in my first class each semester: considering amiable morality as the only form of morality. Young Henderson was practicing amiable morality by helping the other guy look for his ball. But he was violating mundane morality by breaking his contract with his brother.
The mundane virtues, such as justice, are key to society, as Adam Smith argues. The amiable virtues, like love and generosity, are ornamental. Society without amiable virtues would be terrible and boring, but without mundane virtues it could not exist.
Young Henderson’s actions are praiseworthy in the narrow view of amiable virtues. But his actions nonetheless were violations of his duties under justice and honor (the mundane), and thus his actions were blameworthy to the Elder Henderson. To the impartial spectator (in this case, Mother Henderson), Younger Henderson’s actions would be overall blameworthy
Phil H
Dec 15 2019 at 11:46am
Hi, Jon. Sorry, I wasn’t clear enough. I didn’t mean that DH’s actions were amoral, either way. I completely agree with you that honouring his contract is a moral way to behave.
What is amoral (often) is the market conduct of employers. Employers are often companies, i.e. financial/legal constructs, not people. As such, they are not necessarily bound by (some) rules of morality.
so you get situations where an employee may be morally and/or legally bound to do things that one is normally not required to do. A light bulb saleswoman, having signed her contract, is morally obliged to sell light bulbs! At the same time, this saleswoman is still subject to all the other moral obligations that she had before: to be polite, to save drowning children, to take care of her own family, to avoid damaging the environment, etc.
The potential for conflict always exists between any set of moral obligations. Now, when contracts introduce moral obligations around activities that are in themselves not morally salient, the potential space for conflicts grows much larger. And that sets the scene for the evolution of big complex systems of dispute resolution like the law.
Jon Murphy
Dec 15 2019 at 11:53am
Again, that’s not true. They are bound by the rules of justice, of mundane morality. Whether we conceive of the two Hendersons as two people or two corporations, by above point remains the same.
David Henderson
Dec 15 2019 at 12:30pm
I agree with Jon here. If I, at 9 or 10 years old, had incorporated, none of the reasoning or ethics would have been different.
Dylan
Dec 15 2019 at 3:39pm
Jon,
This just isn’t true. Morality, inasmuch as it can be said to exist, is always a human construct that applies to individuals. The people behind a corporation may have certain moral obligations arising from their relationship with that organization, but saying that the corporation itself does is nonsensical. Indeed, I’d be surprised if you hadn’t made a similar argument if someone else was saying the same thing about “government” or “society” or some other “we.”
Jon Murphy
Dec 15 2019 at 7:23pm
And also groups of people.
Then allow me to state clearly for the record:
Government is also bound by mundane morality. Society is also bound by mundane morality. When a government violates mundane morality, even though a special feature of government is that it can violate mundane morality, it is often justly condemned. Don’t believe me? Check out what is going on in Hong Kong right now. The central government of Beijing is violating justice and people are reacting and condemning them.
Now, if you want to say that individuals within Beijing are the ones violating justice because they are the ones choosing, that is fine. But that does not change my point, in which I use “government” and “corporation” as shorthand for the choosing entities.
Thomas Hutcheson
Dec 17 2019 at 7:00am
And why was Henderson the Elder not as bound by the duty to help the other golfer as the the younger? What about the stories of the Tylenol salesmen who returned to their customers to remove product from the shelves on hearing the news of the tainted batches? If a firm does have discretion, it is not the equilibrium point on a supply and demand graph, why should it’s agents not take into account whether stockholders would want them to maximize profit when this conflicts with some other good thing?
Jon Murphy
Dec 15 2019 at 11:55am
Also, precisely because there is so much gray area among morality and one’s duty, it is bad for legislation or courts to get involved.
Dylan
Dec 15 2019 at 3:40pm
This just seems inevitable though, right? Like, what are your thoughts on the right to contract murder for hire?
Jon Murphy
Dec 15 2019 at 7:24pm
Murder for hire is a violation of justice, of mundane morality. It is the just and proper role for a government (assuming one to exist) to prohibit such behavior.
BC
Dec 15 2019 at 9:12pm
I don’t know how any regulator could possibly determine whether the man valued finding his golf ball more than Paul valued David’s caddying. Suppose the man bought a beer after his round because he saved money by not hiring a caddy to help him look for golf balls. That would have meant that he favored beer over finding his golf balls, whereas Paul favored caddying services over a post-round soda. If a regulator had required David help the man look for his golf ball and, in return, the man give up his beer to buy Paul a soda, society would have been worse off. No regulator could possibly determine the relative value that Paul and the man place on caddying and finding golf balls vs. post-round beer and soda vs. all other ways that resources could be allocated. Such information is only available through markets and price signals.
Thus, it should not be “normal” for society to regulate businesses because regulators lack knowledge of the distributed information necessary to craft regulations that will benefit society overall, taking into account all of the unseen and unintended consequences. There may be some *exceptional or abnormal* circumstances where regulation can help, but the case for regulation requires overcoming the presumptive burden that, under “normal” circumstances, regulators lack the knowledge necessary to avoid doing more harm than good.
Phil H
Dec 15 2019 at 11:43pm
Hi, BC. I’m not sure I disagree with you!
When I said normal to regulate, I didn’t mean that regulation should be pervasive. Only that abnormal, borderline cases will inevitably arise, and some mechanism will have to be found to deal with them (arbitration is an example of a mechanism that doesn’t involve the state).
However, it does seem that the vast complexity of modern business makes it inevitable that some level of regulation will be required. It’s not practical to expect any small or medium business owner to be able to think of all the different issues that will inevitably affect her company (e.g. accounting, tax, safety, security), so regulation exists to simplify processes.
Thaomas
Dec 17 2019 at 7:28pm
The way that this issue gets regulated (if it were common enough) is that people like Henderson the Elder would bring suit against people like Henderson the Younger for breech of contract and judges would decide, given on the particulars of the cases whether to assess damages to Henderson the Elder (or possibly to fine him for bringing a frivolous suit).
Thaomas
Dec 15 2019 at 6:50am
All contracts are incomplete. Law courts exist to resolve differences of interpretation, although sometimes regulation or Pigou taxation is a lower cost or the only way to go.
David Henderson
Dec 15 2019 at 10:10am
See my response to Phil H. above. Law courts, regulation, Pigovian taxes? In a case where my brother probably paid me $1 and the thing was over and done?
Jon Murphy
Dec 15 2019 at 10:40am
It is true in the Posnerian framework there may be a cost-benefit argument made to justify regulation to fill certain holes in contracting.
However, given the nature of costs and benefits, and specifically choice-influencing costs, the Posnerian argument is extremely weak, as I discuss in a paper currently under review for publication (an early, albeit slightly fragmentary, draft can be read here).
Furthermore, as John Nye demonstrates, even in the logic of Pigou, taxation and regulation are often unjustified (see “The Pigou Problem” in Regulation Vol. 31, No. 2).
The case for regulation, especially in contracts, is way weaker than is commonly understood.
BC
Dec 15 2019 at 2:09pm
It’s a really difficult concept for many people to internalize: that serving customers is “solving (most of) society’s problems” because customers are (a huge) part of society. Customers’ problems are society’s problems. Customers are so numerous and faceless, and successful businesses are so efficient at solving their problems, that we take all of that societal good for granted. Also, people have trouble grasping that, even if one’s intent is to earn profits/income for oneself, the consequences of one’s actions could still substantially benefit society. Not only can good intentions have bad consequences, but selfish intentions can have good consequences.
Even harder for people to internalize is that serving customers profitably is a good way to prioritize society’s most pressing problems: profit signals make the most use of the information contained in prices. (Yes, one can argue that some information about externalized costs and benefits is not contained in prices, but prices are still the *best* way to learn the *bulk* of the distributed, localized information about costs and benefits.) People have trouble appreciating how much unseen distributed information they don’t know.
The reason trying to “save society” fails is that what most people call “saving society” is really “ignoring our most reliable means of learning distributed and localized information”.
In the golf example, the man didn’t value finding his lost golf balls enough to hire his own caddie. (Understandable, because golf balls have finite value and one can quite reasonably conclude that hiring a caddie isn’t worth it.) David’s brother did find it worthwhile to hire a caddy. Since both David’s brother and the man are part of society, their revealed preferences were such that society was best served by David caddying for his brother rather than looking for the other man’s golf ball.
IronSig
Dec 24 2019 at 11:04pm
I watched a Tucker Carlson clip earlier this week that made the case that the Bass Pro Shop/Cabela’s merger was instigated by some hedge funds and left Sidney Nebraska high and dry.
I quickly noticed the program’s producers hadn’t included one word of what happened to the customers or if other niche retailers are merging to adapt to Amazon’s competition in this piece. On the surface, the point was to instigate a reaction from one of the hedge fund managers, who Carlson claimed was a significant donor to the GOP.
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