Pro-Human Extremist

Extremism in the defense of humanity is no vice

How businesses serve the greater good

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Hollywood is always on the lookout for good villains. The all-time greats are Nazis and Soviets, but they’re both long gone so they only work in movies set in the past, like Quentin Tarantino’s Inglourious Basterds. The current top villains are I think terrorists and big greedy corporations. The fact that corporations work so well as villains shows that lots of moviegoers are prepared to think the worst of the people who run businesses.

Given the number of corporations in our world, and the hundreds of millions (billions?) of people who work for them, it’s inevitable that their actions would sometimes harm others. But people today too seldom appreciate that the net effect of businesses in our world is overwhelmingly positive, so I figured it might help to enumerate the main positive effects that businesses have.

1) Businesses employ people

Okay, that one’s obvious. Most people in developed economies work for a business, rather than being self-employed. Jobs are good, because they help people feed and clothe themselves and their families. Businesses create jobs that wouldn’t exist if people hadn’t organized and funded the businesses, so the existence of all those businesses makes our world better. Governments create jobs too, but they’ve never managed to do so as effectively on as wide a scale as businesses.

Businesses in developing countries may pay their workers less than some folks in developed countries think is fair or reasonable, but they’re still paying more than their employees would make if they were working on farms, which is why their employees chose to work for them in the first place. Businesses open in developing countries because labor is less expensive there, and once the economy gets going wages start to rise.  Yesterday’s developing economies are today’s emerging economies, like China and Brazil, both of which have more than doubled per capita GDP just in the past ten years. Without businesses, the people in those countries wouldn’t now be on the road to affluence.

2) Businesses earn profits

This one may not seem as obviously good as the first, but consider who owns most of the bigger businesses and therefore gets a share of the profits: you and me and anyone who is saving for retirement. Pension funds are some of the biggest institutional investors today, and if the businesses they invest in didn’t make profits, those pension funds wouldn’t grow and the employees who depend on them wouldn’t get their retirement income. Those of us with defined-contribution pension plans each have much less invested than the big pension funds, but there are many millions of us, and if our portfolios didn’t grow then we too wouldn’t have enough to live on in retirement. All of us are depending on the profitability of the businesses we’re investing our money in.

But profits are bad, aren’t they? No—for two reasons. First, they seldom increase the prices of goods and services much. For the past hundred years, corporate profits have averaged about 5-10% of revenues, which means that goods and services wouldn’t cost much less even if businesses decided to give all their profits back to their customers. Second, the effort businesses make to maximize profits and prevent losses are absolutely essential to keeping businesses running efficiently. Without the profit motive to focus the thoughts and efforts of businesspeople, businesses would surely work enough less efficiently to increase the prices of goods and services above what they currently are. So we’d actually pay more for stuff if businesses weren’t allowed to earn profits! The profit motive is probably also the main reason that businesses create jobs and produce goods and services more effectively than governments have been able to.

3) Businesses create consumer surplus

Create what? Consumer surplus is the difference between how much you have to pay for something and how much it’s worth to you. If a jacket costs you $100 and you get enough use and enjoyment out of it to make it worth $300 to you, then in buying the jacket you got $200 of consumer surplus. If the jacket had been worth just exactly $100 to you, then you would have been equally happy either buying the jacket or keeping your $100—in economics-speak, buying the jacket for $100 wouldn’t have increased your utility.

The consumer surplus associated with any given purchase is difficult or impossible to measure, but the simple fact that we are glad to have bought something shows that there must be some consumer surplus, since our happiness tells us that we feel better off having exchanged our money for that good. And the actual consumer surplus for most of the things we buy is probably quite a bit more than we might guesstimate in this way, since mass-production and globalization have reduced the prices of things to well below the value in use and enjoyment that they actually have for us.

We may not think the jacket is worth much more than $100, because we can find other similar jackets for around the same price. But the real calculation of value should be based on how much benefit and enjoyment we get from any such jacket vs. having more money but no jacket. Jackets keep us warm and dry, and have pockets, and look nice. Wouldn’t you probably pay several hundred dollars at least for those services, if no jackets could be had for less? The difference between that much higher value and the paltry $100 we actually pay is the consumer surplus.

Not convinced yet? Consider the personal computer. Twenty years ago, people paid more money for computers that were way less powerful than today’s, with tiny hard-drives and essentially no internet access—yet they were still happy to exchange that amount of money for that benefit. Today’s computers are cheaper, and they give us access to a much wider range of more powerful software tools together with all of the information and enjoyment on the internet. There was some consumer surplus even in the computer purchases of twenty years ago, or the purchases wouldn’t have happened. A $500 laptop gives you so much more than $500 of value over the time you own it.

We take it totally for granted, but there’s substantial consumer surplus in all of the purchases we make. Why is this? Because businesses have competed against each other to make the design, manufacture, and distribution of goods more and more efficient. Their ceaseless efforts to make better products and to undercut each other on price benefit we the consumers, by giving us more and more consumer surplus with our purchases.

Are businesses admirable?

Okay, so businesses contribute to the greater good. But are businesses started for the purpose of creating jobs and consumer surplus, or for making possible the retirement of people who invest in them? No—they’re started by people who want to make money, and to some extent also by people who want to have fun by realizing a dream. They sell stock when they need more capital to expand, which is where the retirees come in. They create jobs because it’s hard to do much without employees, and they create consumer surplus because they’re constantly competing with each other.

So they serve the greater good merely as a means to an end or an unintended consequence of the desire to make some money. That means they don’t really deserve credit for serving the greater good, if that’s not specifically what they’re trying to do, right? Who cares—my point isn’t that businesses are morally admirable; my point is that their very existence makes our world better far more often than it makes it worse.

© Joel Benington, 2011


Written by Joel Benington

July 22, 2011 at 6:24 pm

Posted in economics, numbers

2 Responses

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  1. […] Here is the original post: How businesses serve the greater good « Pro-Human … […]

  2. And if you want to change the way companies affect people and the planet, carrots are better than sticks:

    Jody F.

    July 29, 2011 at 5:56 pm

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