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Negative Externalities Reduce Public Welfare

Christoper Marquis has a follow-up to his book on the B Corp movement, see here. This has many of the same qualities I admired in the earlier book. The best bits explain how business can be better. He has some excellent examples where businesses are making a positive contribution to the world. That said, the aim of the book goes much further than that. He aims to call out bad business. He discusses negative externalities and public welfare. In effect, how profit-seeking companies (the profiteers of the book’s title) make the world worse.

Negative Externalities Reduce Public Welfare

A negative externality is when a decision made by one individual/firm has a negative impact on another entity. The latter negatively impacted entity does not have a say in the decision and ends up suffering. The decision-maker has no clear incentive to take into account the impacted entity’s needs. This is a hugely important point. One condition allowing markets to work well is that those experiencing the outcomes get a choice in the decision. Yet, negative externalities don’t give that choice and so can reduce public welfare. The value of markets — whether they make the world a better place — is eroded by negative externalities.

Of course, one solution is that all decision-makers voluntarily take account of everyone else in their decisions. Sadly, this is not what human beings always do. (Although to be fair, sometimes we do care about others and aren’t always as selfish as we could be).

Shareholder Value Maximization

A challenge Marquis points out is that the currently dominant philosophy of business, shareholder value maximization, has elevated not caring about those beyond shareholders to an art form. (For more on this idea see here). For business to genuinely increase public welfare there must be minimal negative externalities. (Ideally, profitable decisions can even come with lots of positive externalities —- benefits to those who aren’t making the decision). Business managers must care about others to be motivated to reduce negative externalities and many don’t. If business people aren’t planning to care, then regulators must force business to pay for the externalities to ensure that these get considered. Sadly, regulators often aren’t powerful or effective enough to do this.

Bad Business

Given we live in an imperfect world, business doing bad is an important area for Marquis to discuss. He does point to negative externalities. That said, I would have liked more detail on how we assess and factor in problems. There is a desperate need for more detail on where business is going wrong. Marquis points to some issues but given the focus of the book is on this I had hoped for a little more. In general, more data would have been nice as would greater specificity about the exact bad decisions being made.

Win-Wins

For my taste, Marquis is also too negative about the idea of ‘win-wins’ in business. He is surely right that win-wins won’t solve all the problems of the world. (A win-win is when business is profitable while also helping others). There are certainly times when the profitable course for a firm is to abuse others. But he seems to suggest that people who think win-wins can happen also think that they must always happen. I have never met anyone who believes in the inevitability of win-wins so his straw man is quite weak.

…one wonders about the logic of the win-win view, in which businesses’ gains inevitably lead to society’s welfare.

Marquis, 2024, page 51

Win-wins won’t solve all our problems but how about we bank any win-wins that we can find?

To me, dismissing the idea that win-wins occur seems unhelpful. Not least because the financial accounting system often does a poor job of capturing superior performance for shareholders. Given financial accounting doesn’t capture long-term performance well in our world, a long-term focused manager could do better for the shareholders and also other stakeholders in some situations. Our assessments of profit are imperfect — so businesses might be hurting other stakeholders and still not delivering profit for shareholders, a lose-lose. Let’s not do that. Let’s take the win-wins instead.

Gaslighting

At the risk of sounding old, where Marquis lost me was his regular use of ‘gaslighting’. This seemed to be what business constantly does according to him. This presumably is because gaslighting to him seems to cover a variety of largely unrelated sins. As he tells us, gaslighting involves deliberately convincing someone that reality is different to what they think it is. It is certainly possible to argue that business does this in some situations. That said, everything seemed to be gaslighting. If someone in business (or Ronald Reagan) genuinely believed they were doing well by the world (even if their belief was very wrong) and tells us this then surely this isn’t gaslighting. It is simply a good old-fashioned error.

Use Of Gaslighting In The Profiteers

We shouldn’t just believe that all who disagree with us that business must be better are sinister figures trying to mess with our heads. On some issues, we must be open to conceding that they may even have a valid point. Of course, sometimes they are simply just idiots but still that does not make them gaslighters.

Disagreeing with better business ideas doesn’t make someone a shadowy malevolent mastermind whose objective is to mess with our perceptions of reality. Some who disagree about better business being possible have the odd good point in some situations, some are fools, and some others may simply not care about anyone who isn’t them enough to bother messing with our heads.

Read: Christoper Marquis (2024) The Profiteers: How Business Privatizes Profits and Socializes Costs, PublicAffairs

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