In the past few days, as I've received reader feedback on my posting on Bush's immigration speech, a common retort I've received is that I shouldn't mind if my portfolio benefits from a corporation's exploitation of its workers, whether illegal immigrants or not. So, I asked myself, when, if ever, does social responsibility trump a corporation's lawful right to profit? This question has been debated from the time of Adam Smith, who once remarked, “[I]t is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.” In other words, corporate actors have a vested interest in acting responsibly, as acting irresponsibly or wastefully will, in theory, destroy their enterprise. While I haven't discovered a way to provide this source online, an excellent documentary addressing this question is fairly reviewed here.
As I ponder this question and search for my own evidence, my thoughts first turn to the Kansas City Royals, a shining example of corporate irresponsibility. With their most recent loss today, the Royals are a major-league worst 10-31. After today's loss, KC pitcher Scott Elarton quipped, "[W]e're just terrible. There are no two ways about it. We're pretty much bad in every facet of the game." Despite the fact that the team is terrible and, quite frankly, has been the worst team in baseball for several years, Forbes magazine recently reported that the team cleared a twenty million dollar profit in 2005. The team vigorously disputes the Forbes report, but (perhaps conveniently) cannot issue any empirical evidence of its finances pursuant to the rules of Major League Baseball. Sources indicate that the Royals, with a thirty-six million dollar payroll and inconsequential external expenses for uniforms, miinor leaguers, etc., will receive in excess of fifty-five million in MLB revenue sharing money this year. Thus, all the Royals need to do to be profitable is simply to exist. It doesn't matter if the Royals ever draw a single fan. Good for the business, bad for its customers. Given the woeful state of the Royals franchise from the perspective of its fans, it should come as no surprise to learn that the owner of the Royals, David Glass, is the former President and CEO of Wal-Mart, a corporation that has received broad criticism for failing to act responsibly.
Apparently, Glass is taking what he learned at Wal-Mart and transplanting it to the sports entertainment industry. It doesn't take much effort to find examples of Wal-Mart, bolstered by tax incentives granted by shortsighted local governments, cruising in to town to usurp the markets once dominated by locally-owned and operated businesses. After a brief war of attrition, local merchants close up shop, layoff their employees and contribute to the recently saturated commercial real estate market. After that, Wal-Mart can, in many senses, operate in a market similar to that of the Kansas City Royals. By simply existing as the only retailer in town, guaranteed to profit, Wal-Mart, like the Royals, has no incentive to "field a winning team," but can, instead, exhaust its welcome package of tax breaks and either timely relocate to another market or leverage its monopoly position to extract an extension of those incentives. To the extent you believe Wal-Mart would not engage in such behavior, you really need to see Wal-Mart: The High Cost of Low Prices.
A consequence of the destruction of the locally-owned business is a significant decline of reinvestment of local retail profits. The revenue once generated by locally owned businesses is now driven exclusively to Wal-Mart, to be transferred to the institutional investors that own Wal-Mart stocks and bonds, or used by the corporate offices to conquer new markets or create new "efficiencies" to extract even more profit margin from its suppliers. Good for Wal-Mart, bad for the exploited municipalities, low-paid Wal-Mart employees and pinched suppliers. In essence, the profit is taken away from the local economy with little to no local reinvestment. The tax that can be collected by local government on Wal-Mart's local sales is often earmarked for public safety, educating our ever-growing adolescent population, supporting the indigent and rebuilding or expanding the infrastructure required by the beheamoth big-box retailer. Moreover, because Wal-Mart fails to provide benefits to many of its workers, these needs are socialized to the local government and, ultimately, taxpayers. All of these expenses, in the aggregate, always exceed the sales tax revenue. It's the modern business model slam-dunk, socialize the risk and "externalities," while privatizing the profit. At the end of the day, towns that are overrun by national retail chains will get the raw end of the deal.
Of course, it's not only Wal-Mart and other retail giants that fail to reinvest locally, but, rather, a multitude of industries and service companies from your local office of a national insurance company to the local subsidiary of your power supplier. As stated above, these companies are also often enjoying tax relief (whether local, state or federal) and other incentives not available to small, locally owned businesses. Unfortunately, local governments face a Catch-22, choosing between destroying the local economy through granting these tax subsidies in order to lure these businesses to town or suffering through the high unemployment that results from population growth coupled with the flight of manufacturing companies reducing their costs by
relocating to countries with cheap, willing labor. This system, if continued, will ultimately destroy local economies and, eventually, the national consumer economy. Bad for everyone except multinational corporations that can continue to seek out low cost labor, while piling up profits for those few individuals and institutions that can afford to benefit from substanital ownership in the equity or bonds of multi-national corporations.
Another glaring example of corporate irresponsibility is pollution. Again, with corporation's acting on a pure profit motive, it's no wonder why they choose to pollute. It's simply cheaper than not polluting. Investing in pollution control is much more expensive than simply bribing regulators and "contributing" to the right people on the House and Senate committees that control energy legislation and regulation. Again, there's precedent for this practice. Remember the Pinto? Prior to the first model coming off the line, Ford Motor Company has been proven to have had extensive knowledge that the fuel system on its Pinto Model would explode in many garden-variety rear-end collisions. Rather than spend the extraordinary sum redesigning the automobile and retooling its assembly line, Ford made an internal "cost-benefit analysis" that indicated that settling wrongful death lawsuits would be cheaper than investing in alterations to its manufacturing process. After eight years and hundreds of deaths, Ford made those adjustments. However, it confessed no guilt, instead settling with the NTSB for an undisclosed sum while admitting no wrongdoing, thus avoiding any nasty civil lawsuits based on admitted criminal behavior.
Returning to my initial prompt, when, if ever, does corporate responsibility trump a corporation's lawful right to profit? The answer, it seems to me, is when the pursuit and capture of profit causes more harm than good. Corporations and their evil step-daughters, the private equity funds, do promote economic growth on a pure profit basis. This growth and the concomitant profits, however, are increasingly going into the hands of fewer and fewer people. We'd all like to believe that the people who receive this disproportionate amount of wealth are all philanthropists and statesmen. That notion is simply too often incorrect. In many instances, personal wealth has become a selfish man's pursuit. In even the best case scenario (the Gates Foundation's effort to eradicate malaria, for example), vast sums of money are appropriated to fewer and fewer causes with little to no domestic, small-scale focus.
I truly believe that an economic system that prohibits monopoly and discourages the pure profit motive produces a more open, clean, egalitarian and stable society. If the above examples of Wal-Mart and the Kansas City Royals suggest anything, it's that avarice, whether individual in Mr. Glass's case or a coalition of Wal-Mart shareholder-executives, will ultimately destroy the object of their exploitation. Fortunately, the Royals operate in a system in which twenty-nine other teams have power over their operations. Those teams will ultimately have to fix the system that allows the Royals to profit solely on money paid by those other teams. However, corporate beheamoths like Wal-Mart face no such peers.
Absent monopolies or significant barriers to entry, markets will act efficiently. However, when the market is as vast as the American political landscape, and is staffed by officials that are beholden to corporate contributors, there is little efficiency or collective good. Corporate avarice goes unpunished and, consequently, unchecked when the only force operating to admonish it is itself propped up by it. While those who exploit in avarice will benefit in the short term, they, and everyone they exploit, will suffer over time.
Your comments are welcomed.
As I ponder this question and search for my own evidence, my thoughts first turn to the Kansas City Royals, a shining example of corporate irresponsibility. With their most recent loss today, the Royals are a major-league worst 10-31. After today's loss, KC pitcher Scott Elarton quipped, "[W]e're just terrible. There are no two ways about it. We're pretty much bad in every facet of the game." Despite the fact that the team is terrible and, quite frankly, has been the worst team in baseball for several years, Forbes magazine recently reported that the team cleared a twenty million dollar profit in 2005. The team vigorously disputes the Forbes report, but (perhaps conveniently) cannot issue any empirical evidence of its finances pursuant to the rules of Major League Baseball. Sources indicate that the Royals, with a thirty-six million dollar payroll and inconsequential external expenses for uniforms, miinor leaguers, etc., will receive in excess of fifty-five million in MLB revenue sharing money this year. Thus, all the Royals need to do to be profitable is simply to exist. It doesn't matter if the Royals ever draw a single fan. Good for the business, bad for its customers. Given the woeful state of the Royals franchise from the perspective of its fans, it should come as no surprise to learn that the owner of the Royals, David Glass, is the former President and CEO of Wal-Mart, a corporation that has received broad criticism for failing to act responsibly.
Apparently, Glass is taking what he learned at Wal-Mart and transplanting it to the sports entertainment industry. It doesn't take much effort to find examples of Wal-Mart, bolstered by tax incentives granted by shortsighted local governments, cruising in to town to usurp the markets once dominated by locally-owned and operated businesses. After a brief war of attrition, local merchants close up shop, layoff their employees and contribute to the recently saturated commercial real estate market. After that, Wal-Mart can, in many senses, operate in a market similar to that of the Kansas City Royals. By simply existing as the only retailer in town, guaranteed to profit, Wal-Mart, like the Royals, has no incentive to "field a winning team," but can, instead, exhaust its welcome package of tax breaks and either timely relocate to another market or leverage its monopoly position to extract an extension of those incentives. To the extent you believe Wal-Mart would not engage in such behavior, you really need to see Wal-Mart: The High Cost of Low Prices.
A consequence of the destruction of the locally-owned business is a significant decline of reinvestment of local retail profits. The revenue once generated by locally owned businesses is now driven exclusively to Wal-Mart, to be transferred to the institutional investors that own Wal-Mart stocks and bonds, or used by the corporate offices to conquer new markets or create new "efficiencies" to extract even more profit margin from its suppliers. Good for Wal-Mart, bad for the exploited municipalities, low-paid Wal-Mart employees and pinched suppliers. In essence, the profit is taken away from the local economy with little to no local reinvestment. The tax that can be collected by local government on Wal-Mart's local sales is often earmarked for public safety, educating our ever-growing adolescent population, supporting the indigent and rebuilding or expanding the infrastructure required by the beheamoth big-box retailer. Moreover, because Wal-Mart fails to provide benefits to many of its workers, these needs are socialized to the local government and, ultimately, taxpayers. All of these expenses, in the aggregate, always exceed the sales tax revenue. It's the modern business model slam-dunk, socialize the risk and "externalities," while privatizing the profit. At the end of the day, towns that are overrun by national retail chains will get the raw end of the deal.
Of course, it's not only Wal-Mart and other retail giants that fail to reinvest locally, but, rather, a multitude of industries and service companies from your local office of a national insurance company to the local subsidiary of your power supplier. As stated above, these companies are also often enjoying tax relief (whether local, state or federal) and other incentives not available to small, locally owned businesses. Unfortunately, local governments face a Catch-22, choosing between destroying the local economy through granting these tax subsidies in order to lure these businesses to town or suffering through the high unemployment that results from population growth coupled with the flight of manufacturing companies reducing their costs by
relocating to countries with cheap, willing labor. This system, if continued, will ultimately destroy local economies and, eventually, the national consumer economy. Bad for everyone except multinational corporations that can continue to seek out low cost labor, while piling up profits for those few individuals and institutions that can afford to benefit from substanital ownership in the equity or bonds of multi-national corporations.
Another glaring example of corporate irresponsibility is pollution. Again, with corporation's acting on a pure profit motive, it's no wonder why they choose to pollute. It's simply cheaper than not polluting. Investing in pollution control is much more expensive than simply bribing regulators and "contributing" to the right people on the House and Senate committees that control energy legislation and regulation. Again, there's precedent for this practice. Remember the Pinto? Prior to the first model coming off the line, Ford Motor Company has been proven to have had extensive knowledge that the fuel system on its Pinto Model would explode in many garden-variety rear-end collisions. Rather than spend the extraordinary sum redesigning the automobile and retooling its assembly line, Ford made an internal "cost-benefit analysis" that indicated that settling wrongful death lawsuits would be cheaper than investing in alterations to its manufacturing process. After eight years and hundreds of deaths, Ford made those adjustments. However, it confessed no guilt, instead settling with the NTSB for an undisclosed sum while admitting no wrongdoing, thus avoiding any nasty civil lawsuits based on admitted criminal behavior.
Returning to my initial prompt, when, if ever, does corporate responsibility trump a corporation's lawful right to profit? The answer, it seems to me, is when the pursuit and capture of profit causes more harm than good. Corporations and their evil step-daughters, the private equity funds, do promote economic growth on a pure profit basis. This growth and the concomitant profits, however, are increasingly going into the hands of fewer and fewer people. We'd all like to believe that the people who receive this disproportionate amount of wealth are all philanthropists and statesmen. That notion is simply too often incorrect. In many instances, personal wealth has become a selfish man's pursuit. In even the best case scenario (the Gates Foundation's effort to eradicate malaria, for example), vast sums of money are appropriated to fewer and fewer causes with little to no domestic, small-scale focus.
I truly believe that an economic system that prohibits monopoly and discourages the pure profit motive produces a more open, clean, egalitarian and stable society. If the above examples of Wal-Mart and the Kansas City Royals suggest anything, it's that avarice, whether individual in Mr. Glass's case or a coalition of Wal-Mart shareholder-executives, will ultimately destroy the object of their exploitation. Fortunately, the Royals operate in a system in which twenty-nine other teams have power over their operations. Those teams will ultimately have to fix the system that allows the Royals to profit solely on money paid by those other teams. However, corporate beheamoths like Wal-Mart face no such peers.
Absent monopolies or significant barriers to entry, markets will act efficiently. However, when the market is as vast as the American political landscape, and is staffed by officials that are beholden to corporate contributors, there is little efficiency or collective good. Corporate avarice goes unpunished and, consequently, unchecked when the only force operating to admonish it is itself propped up by it. While those who exploit in avarice will benefit in the short term, they, and everyone they exploit, will suffer over time.
Your comments are welcomed.
5 comments:
Very well stated. I found your blog with the next button, and this entry was very well done.
The free market economy is a good system if left alone. You talked about barriers to entry and monopolies causing problems. I think municipalities giving tax incentives to Wal-Mart are as bad as barriers to entry in that they tear down so many barriers for the giants thus encouraging an early exit strategy to the mom-n-pops. By giving the giants a free pass on their way in, it discourages not only growth, but competition.
If Wal-mart would move in, pay taxes (which often times they do not because of the tax incentives--after which they shaft local municipalities by forcing either a continuation of the tax benefits, or they threaten to move to another locale which will support their demands) and provide adequate pay and benefits (i.e. health insurance to full timers), I would relish in their success and hope I could create a business as profitable.
The only thing that will stop them is the dollar. If consumers decided to stop shopping there, Wal-Mart would fail. Hopefully the consumers are educated enough to make them change by taking their business elsewhere...
Thanks for your comment. I agree with the logic of much of what you assert. However, I believe, as set forth in my post, that (1) municipalities are forced to provide tax breaks as a means of survival-- if they don't roll out the red carpet to the "giants," then the next town over will, and (2) in many cases, consumers can not take their business elsewhere because all alternatives have been eradicated by the "giants" domination and consequent destruction of viable retail alternatives. The only thin that will end this cycle of domination is the failure of the consumer to spend any money. Absent a change in the current system of deteriorating local economies and the international flight of middle-class jobs, consumers (who already, in the aggregate, have a negative savings rate) will slowly become "tapped out" and have no income, disposable or otherwise, to expend. That's a lose-lose for everyone.
With regard to my assertion on the negative perosnla savings rate, see: http://biz.yahoo.com/ap/060525/economy.html?.v=12
Consumers boosted their spending in the first quarter at a 5.2 percent pace. That was the strongest since the third quarter of 2003, but was slightly less than the 5.5 percent pace first estimated.
"With spending outpacing income growth, the personal savings rate -- savings as a percentage of after-tax income -- dropped to negative 1.3 percent in the first quarter, the worst showing since the third quarter of 2005."
I hear you RW.
I don't think, however, municipalities are forced to subscribe. If the "giants" move elsewhere, the municipality that rejected them in the first would fare better, I would think. Walmart pays little or no taxes because of the incentives cities are forced to provide and therefore do not add to the tax base where they are.
One could assert that the "giants" help the tax base because of spending at the peripheral businesses that spring up in the parking lot of the Walmarts. The "giants" draw people who then spend money at the other businesses--so you could say they benefit communities indirectly, but I don't agree with the assertion. I think they cause more harm by bullying municipalities and playing outside the free market than they do good by drawing people to peripheral businesses...
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