Are we over profit maximization?

Friedman: A business is obligated to maximize shareholder value, nothing more.

Everyone else: That’s crazy! Profit maximizing businesses roll over all sorts of other stakeholders and fail to live up to basic ethical standards.

This relates to a complaint I’ve made before. Markets are good at generating prices that reflect aggregate views on the relative scarcity/importance of various goods. Markets aren’t good at charity. To roll other things in there means a good old fashioned price is now a price plus an obligation to do some moral calculus in how we each interact with the complex adaptive system that is the world economy. It’s a recipe for disaster.

So what do we do? We recognize the gap between a world where Friedman’s advice is reasonable and the world we live in, then we figure out how to close that gap. That Friedman’s doesn’t match our world says more about our world than it does about Friedman’s argument.

Rather than move Friedman’s starting point by trying to juggle competing demands of various stakeholders without markets, we should think about the legal framework these stakeholders are acting in.

If we refine our understanding of who has what rights to make what decisions we’ll see that the reason profit maximizers (and vote maximizers) sometimes do bad things is because it’s the best choice available to them. The answer isn’t to say “businesses lobby business therefore they shouldn’t respond to incentives!” it’s to say “therefore we should restrict opportunities to seek rents!”

Coase wasn’t trying to tell us that spillovers don’t matter. He was trying to tell us that transaction costs do matter and whenever they’re present, we need to be careful in allocating rights that have spillover effects. By the same token, we should think of Friedman’s advice as saying “in a perfect world, corporations should maximize profits, but the world needs work.”


  1. There’s a long history of “grievance studies” in the US Chris Calton, Mises Wire
  2. The gap in preferences between men and women Alex Tabarrok, Marginal Revolution
  3. Asians are crazy and rich, but also generous Parag Khanna, Ozy
  4. Why it’s time to end factory farming Jacy Reese, Quillette

We don’t have to ruin markets to do charity

This post is for Democrats and Republicans, not libertarians. Let’s take it for granted that we want to help poor people and we’re willing to use the coercive power of government to do so.* The trouble with the interventions below is so troubling that we don’t even have to bother about having a deep philosophical debate. I’m not trying to change your destination, I’m just trying to get you to get out of that explosive Ford Pinto.

Minimum wage, water pricing, education, and just about all of American health care finance involves distorting markets to give charity and/or gifts. Essentially, they change rules so that group X pays Y instead of Z with the hope that X can afford it and Z can do more good with the money than Y. But this indirect giving has serious flaws.

Take the case of the minimum wage: it’s supposed to help the working poor by making their boss and consumers pay a bit more for their services. Of course it might simply be to help interest groups, and that further raises the burden of proof for those who would prefer a minimum wage to less invasive alternatives.

So what is this less invasive alternative? Cash transfers. We’ve already got some imperfect versions of this. School vouchers, food stamps, and a host of other welfare programs. What I want to see is a simpler version that takes the best features of these programs to eliminate the problems created by market interventions.

The economics of this proposal are simple and important. Prices are essential to help people use resources wisely. Interfering with the market process makes those prices less effective at communicating information about value and opportunity cost. And with an interconnected markets, a small price control can lead to worse decisions being made all across an economy.

Simple economics tells us that if we impose a minimum wage (or give special tax treatment to XYZ, or whatever) then something’s got to give. It might be higher unemployment, it might be worse working conditions, or it might simply be that rich people are a little less rich than before.

(It’s worth remembering that rich people are people too; even lawyers. They can do good and bad things, and those actions determine their moral quality, not their wealth per se… we don’t want to redistribute wealth for its own sake, we want to do so if/because we think it will do some good. The hope is that the harm of a few bucks out of your pocket does more good for the poor people who get that cash. And no, it’s not possible for “corporations” to suffer; corporations aren’t people, but they are owned by people.)

Consider the case of feeding the poor. It’s not hard (even for non-economists) to imagine how imposing price controls on food could lead to shortages. If there’s one thing we learned from socialism, it’s that bread lines are bad. Food stamps are a much simpler and targeted solution.

We should prefer straightforward transfers over market intervention because it will do more good at less cost. More importantly, it is humbler–distorting markets requires a lot of information, transfers don’t.

Transferring money rarely jives well with American intuition, and that brings up an important bundle of issues: responsibility and social engineering.

Republicans, for all their talk about the importance of individual responsibility, seem unwilling to let the poor exercise it themselves. They’re sure that enough poor people will abuse the system that some bureaucrat needs to exercise responsibility for them. Similarly, Democrats want to ensure the dignity of the poor, but how is anyone supposed to remain dignified while navigating labyrinthine bureaucracy?

The left should like cash transfers because they can help those we want to help, and take advantage of the information available to those with intimate knowledge of their context. The right should like it because it can replace a series of bloated bureaucracies while returning responsibility to the poor. Everyone should like that it will be cheaper and more effective than what we’ve currently got while creating better prospects for long-run economic growth.

We should absolutely debate whether specific transfers are a good idea (particularly middle-income to middle-income transfers like higher ed subsidies, mortgage interest subsidies, etc.), but for those programs we ultimately take on, we shouldn’t shoot ourselves in the foot by trying to do good by screwing up markets.

*As an economics professor I get to see what economic superstitions recent high school grads have. I’m struck with the confusion between the health of government and the health of the country a government is supposed to be helping. A related pair of confusions is that what a government can do, it should do; and if something isn’t already happening, and might be nice, government should make it so.

Missing from these superstitions is that the fundamental feature of government is force. What differentiates government from any other non-profit organization, is that charities and associations can’t put you in jail if you choose not to behave as they see fit. But for the sake of clarity, let’s put aside that issue and just focus on how the government can help the poor.

Mundane work is morally praiseworthy

Economists hold an important piece of wisdom that needs sharing: noble acts don’t occur in a vacuum. Mundane acts derive moral worth through their support of heroic acts. Even if they aren’t praised as heroes, everyone who is being productive should feel warm and fuzzy inside for their contributions.

Let’s put this bit of knowledge together with the “equimarginal principle” (EP). EP is an outcome of the intuitive idea of the Law of Diminishing Marginal Return: if you keep doing more of something, each extra bit yields smaller benefits. First slice of pizza: great. Second slice: good. Third slice: meh. Fourth slice: regret. EP gives us a rule to improve our life: cut back on pizza and drink more beer. Balance your choices so that the marginal net benefit is equal across all avenues. If it’s not, then cut back on those choices that yield relatively low benefit and do more of the things with high marginal benefit.

This applies on a societal level too. And to charity. What is the marginal value of an extra dollar invested in cause X? Cause Y? Take some money out of the low marginal benefit cause and shift it to the other. Cancer research is a worthy goal, but you can do more for the world by donating to a less saturated cause. I’m not saying nobody should research cancer. I’m only saying the marginal researcher could create more value in some other venue.

Back to my main point. The team that cures cancer will be lauded as heroes. But some of that praise belongs to the people who support them. The people who made their equipment made their project possible. So did the people who provided gasoline so they could drive to work. These people won’t get this praise, but recognition isn’t the root of morality.

These unsung heroes are making the world a better place. They allow the “real” heroes to pursue their comparative advantage. It’s not just those on the front lines who are making the world better. EP tells us that pursuing that praise isn’t always praiseworthy. You are short-changing your cause if you pooh-pooh support roles. And because of the nature of voluntary exchange, “support role” doesn’t have to be narrowly defined to “volunteer for your preferred cause.” Just by being productive in your usual life you are contributing something. It’s certainly praiseworthy to go further and donate to some cause, but we shouldn’t ignore the fact that working for others (i.e. your customers) is virtuous in and of itself.

Contribute to society where you can contribute the most net benefit. Pursuing praise alone is not how you make the world a better place.

And don’t forget: you’re part of society too. So don’t be afraid to treat yourself!

Investment & Prudence

To be prudent amounts to making sure that one takes good care of oneself in all important areas of one’s life. Health, wealth, family, friendship, understanding, etc. are all in need of good care so that one will achieve and sustain one’s development as a human individual. It all begins with following the edict: “Know thyself!”

All those folks who make an effort to keep fit and to eat properly are embarking on elements of a prudent life. Unfortunately, the virtue of prudence has been undermined by the idea that everyone automatically or instinctively pursues his or her self-interest.

We all know the rhetorical question, “Isn’t everyone selfish?” Because of certain philosophical and related doctrines, the answer has been mainly that everyone is. In the discipline of economics, especially, scholars nearly uniformly hold the view that we all do whatever we do so as to please ourselves, to feel good. No room exists there for pure generosity or charity, for altruism, because in the final analysis everyone is driven to act to further his or her own wellbeing, or for carelessness, recklessness. If people do not achieve the goal of self-enhancement, it is primarily out of ignorance – they just don’t know what is in their best interest but they all intend to achieve it and even when they appear to be acting generously, charitably, helpfully and so on, in the end they do so because it gives them satisfaction, fulfills their own desires and serves their idea of what is best for them.

This is not prudence but what some have dubbed animal spirit. People are simply driven or motivated to be this way, instinctively, if you will. The virtue of prudence would operate quite differently.

One who practices it would be expected to make a choice to pursue what is in one’s best interest and one could fail also to do so. Practicing prudence is optional, not innately produced. Like other moral virtues, prudence requires choice. It is not automatic by any means. The reason it is thought to be so, however, has to do with the intellectual-philosophical belief that human conduct is exactly like the behavior of non-human beings, driven by the laws of motion!

Once this idea assumes prominence, there is no concern about people having to be prudent. They will always be, as a matter of their innate nature. What may indeed be needed is the opposite, social and peer pressure to be benevolent or kind, to adhere to the dictates of altruism, something that requires discipline and education and does not come naturally to people.

It would seem, however, that this idea that we are automatically selfish or self-interested or prudent doesn’t square with experience. Consider just how much self-destructiveness there is in the human world, how many projects end up hurting the very people who embark upon them. Can all that be explained by ignorance and error?

Or could it be, rather, that many, many human beings do not set out to benefit themselves, to pursue their self-interest? Could it be that human beings need to learn that they ought to serve their own wellbeing and that their conduct is often haphazard, unfocused, even outright self-destructive (as, for example, in the case of hard drug consumers, gamblers, romantic dreamers, fantasizers and the lazy)?

It seems that this latter is a distinct possibility if not outright probability. It is a matter of choice whether one is or is not going to be prudent, in other words. And once again, ordinary observation confirms this.

One can witness numerous human beings across the ages and the globe choosing to work to benefit themselves, as when they watch their diets or work out or obtain an education, and many others who do not and, instead, neglect their own best interest. Or, alternatively, they often act mindlessly, thoughtlessly, recklessly, etc.

The contention that they are really trying to advance their self-interest, to benefit themselves, seems to be one that stems from generalizing a prior conviction that everything in nature moves so as to advance forward. This is the idea that came from the philosopher Thomas Hobbes, who learned it from Galileo who took it from classical physics.

Accordingly, acting prudently, in order to advance one’s wellbeing, could be a virtue just as the ancient philosopher Aristotle believed it to be. And when one deals with financial matters, careful investing would qualify as prudence, just as is working out at a gym, watching one’s diet, driving carefully, etc.

Private Means, Public Ends: Voluntarism vs. Coercion

Do you have friends who are socialists? Show them Robert Zimmerman’s chapter, “New York’s War Against the Vans” in Private Means, Public Ends. Zimmerman shows private enterprise efficiently providing much-needed transportation, while the city transit police block passenger pickup, issue summonses, and otherwise harass van operators and passengers. If government is needed to provide such public goods, why does government keep blocking private services?

The essays in Private Means, Public Ends demonstrate how private efforts have effectively provided public goods. This collection of mostly recent articles reprinted from The Freeman will challenge those who doubt the workability of free markets and buttress the thinking of those already oriented to liberty with excellent examples. Case after case, nicely combining stories with analysis, shows voluntary and market means as more effective than government, despite state barriers and imposed costs.

The introduction by Professor Mixon begins with the metaphor of free human action as a wildflower field, in contrast to the potted plants of state institutions. If wildflowers disappear and all we see are flowers in pots, who can imagine the breathtaking beauty of the wild field—nature’s spontaneous order? Continue reading