Rebecca Henderson, a Harvard business professor, writes about the need for business to become better than it is currently. She has a great book from 2020 on this. (The book is well worth a read, apart from a strange metaphysical bit at the end which was badly in need of an editor to say, “no let’s not confuse everyone with that section”). One important argument she makes is that strong states help markets to thrive.
A Both/And Proposition
A lot of this book will be familiar to those who have read the sustainable business literature. This makes sense as there are a lot of important points that need to be made and remade. A key theme in sustainable business is an idea explained by Henderson. Doing the right thing is a both/and proposition. To be a sustainable business you can’t just do something good for the world, you also need to make it work as a business strategy. You want your good deeds to continue and making money is essential to helping a business continue doing its business thing.
Having a purpose beyond making money is also pretty essential to having an effective business. Sadly you can’t just decide to have an authentic purpose. It is the fact that you truly believe it the purpose that gives it value.
Trust Aids Better Business
A lot of business relies on trust. Lawyers simply can’t be involved in every detail of every transaction. Given this, what sort of firm would you trust? One that was only out to make as much money as quickly as possible regardless of the consequences, or one that actively cared about its consumers? As Henderson says:
It’s hard to trust an entity who avowed purpose is to make money at your expense at every possible moment.
Henderson, 2020, page 111
When discussing trust it is always helpful to clarify the meaning. A company that only cares for its shareholders can be trusted to take predictable actions, Sadly, you can’t trust them not to poison you if that will make them the most money.
Strong States Help Markets To Thrive
One of the big conflicts in the politics of business is over the role of the state. There are clearly problems when the state regulates everything. Few, in business schools at least, would ever argue that adding red tape to every decision makes business more effective.
The opposite belief remains popular though — that the state should get out of the way and let the market do its magic. The problems that the state going away causes for business often aren’t thought through. Strong states help markets to thrive by creating the sort of environment that helps business. This isn’t simply providing a police force and educating everyone so they can read the fine print of contracts. Part of the reason people trust businesses to do the right thing is that there are guidelines about what the wrong thing is. The presence of meaningful environmental and safety regulations allows the consumer to know that the product is okay. This facilitates exchange by creating confidence on the part of consumer. If consumers don’t have confidence that your product is safe, then they won’t buy it. Regulations can create that confidence. Strong states can really help make business better in every sense of the word better.
In a nutshell, markets require adult supervision.
Henderson, 2020, page 19
It is precisely because we have relatively strong, successful states that we can have such thriving markets.
Free markets only work their magic when prices reflect all available information, when there is genuine freedom of opportunity, and when the rules of game support genuine competition.
Henderson, 2020, page 19
Business needs a strong state to thrive. Ironically, it is because we have relatively effective states people feel confident suggesting the state should go away.
For more on the importance of purpose and profits see Benefiting Owners And Much More, Competitive Advantage And Social Purpose, and Branding For A Purpose
Read: Rebecca Henderson (2020) Reimagining Capitalism In A World On Fire, Public Affairs Books