Blog 16. The Money Feedback Loop

Only profits?

Business fails without profits. Profits make business work. But should business be concerned only with profits? Milton Friedman, winner of a Nobel Prize in economics, said yes in an article that has now become famous.

In 1970, Friedman published his view of social responsibility in the New York Times Magazine.  Friedman argued that the only responsibility of a business is to increase its profits.  Quoting his own book, he repeated, “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game … .” By “rules” he meant no criminal fraud.

Seeing the rich get enormously richer while the poor get poorer in a stratified economy and decaying environment, progressive  business executives now have a different opinion. The B Team group called for a balance of three P’s—Profits, People, and Planet.  In a lecture on “Responsible Capitalism” last February, Paul Polman (CEO of Unilever)said, “Business has a much wider social purpose and value than making money.” Polman acknowledged the unemployment in many countries, the depletion of resources, irreversible environmental change, deforestation, rising populations, and the absence of political leaders willing to confront the difficult issues.

Polman saw people taking matters into their own hands through the movements of Earth Day, Occupy Wall Street, the Arab Spring, all aided  by the social media.  From a business point of view, that’s apparently scary.  He concluded business must make whatever new policies are needed.  Reporting social progress in his own company (which makes food and personal care products),  he said, “Lifebuoy has made that its mission, reaching millions of people across Asia, Africa and Latin America with its educational programmes. … Lifebuoy is no longer just soap, its a movement to improve lives.”

Unilever has done some exemplary things, and I agree that education is a good policy.  However,  I’ll bet the education is tied to the sales of Unilever’s soaps. If business doesn’t profit, it won’t be present.  And are the customers sufficiently sophisticated to distinguish between education and advertising?  Sometimes I’m not.

Polman’s call for “more equitable and sustainable business models” is welcome, warmly reviewed by the Canadian Institute for Business and the Environment.  (Vol. 17 No. 10 online July 2013).  Polman says a revised social responsibility is good business because “It fosters innovation and drives growth.”  I suggest his notion of “good business” requires some caution.  Revised responsibility, yes, but growth is something else.  Unless the economic systems change first, that growth Polman wants will generate more resource consumption and more environmental degradation.


Today’s big question:

Whose interests come first—those of the corporate managers and directors,  those of the shareholders, or those of the public?   Polman says, “the needs of citizens and communities carry the same weight as those shareholders.”  That’s a great philosophy, long overdue.

In 2002, the strategy+business website reviewed an apocalyptic prediction of a financial crisis expected by 2010.  Sure enough, it happened in 2008, and it’s still going on.  The public lost, the executives didn’t, and the fundamental causes continue.   The s+b website gave a little history, describing how Henry Ford raised his workers’ salaries but then was successfully sued in 1916 for breach of fiduciary responsibility. The court said Ford’s money should go to the stockholders, not to the workers.

In 1970, did Friedman also see maximizing profits without regard to social impact simply as doing what’s required by law?

There’s yet another strategy to encourage  corporate responsibility, as reported by the Washington Post and by a sidebar in Hightower.  In 2013, a group of professors and others petitioned the Securities and Exchange Commission (SEC), requesting a ruling that corporate political donations must be made public.  The petitioners claim it’s the stockholders’ money, and stockholders therefore deserve to know how it is spent!  The SEC received some 500,000 comments, mostly supportive of the petition.  House Republicans pressed the SEC chairman to avoid the petition.  Rep. Scott Garrett (R-NJ) identified the petition as bullying by “outside radical groups.”  There we have it.  Social responsibility is radical; buying government is conservative.


Something is missing.

The key point is missing from the revised notion of corporate responsibility. The B Team, Polman (who is also a B Team member), the Occupy Wall Street movement, and others overlook the one change without which all good corporate intentions still lead to more collapse.  It’s government for sale.

As I described in Blog 3 and Blog 14, the world’s economies are complex systems nested within cultures and societies that are also complex systems.  Complex systems have feedback loops, and any system with an unchecked positive feedback loop will self-destruct.  In the U.S. economy, there’s a strong positive feedback in which businesses contribute money to lobbying, political pressure, political candidates, and revision of political information.  That expenditure is not a gift.  It results in subsidies, relaxed environmental rules, contracts, and greater ability to make more money.

It’s ok for business to make money, but not ok for business to control governance.  The money cycle is a positive feedback in which a business gets bigger, competitors are defeated, monopolies arise, and business controls government—otherwise known as fascism.  The rich get richer, the poor get poorer, and the environment remains a free resource for the taking or the dumping.  That’s the result of the money cycle, with or without the good social intentions, and the progressive business leaders refuse to recognize it.


So how do we change direction?

It’s stated in my earlier postings.  To alter the behavior of a complex system, do not attack the undesired symptom directly (e.g. don’t expect to cure poverty with welfare).  Instead, alter a rule by which actors in the system interact and communicate, or alter the system’s goal.  In this case, shift the goal from Gross Domestic Product (GDP, money flow)  to sustainable well-being of the populace, and simply prohibit business from spending its money on government.  After all, there’s legal precedent for that in the Henry Ford case.  If the law forbids spending the profits to raise workers’ salaries, you can’t legally spend the profits to buy government either, can you?

Actually, buying government is just a sophisticated form of bribery.   When it’s done in so-called “third world” countries, we call it corruption. We ought to do better.