Global Economics and Management

A Contrarian Take on the Social Purpose of Business

Over at Bloomberg, Adrian Wooldridge, former Washington bureau chief of The Economist, takes a contrarian take on the social purpose of business. I post this here, not because I necessarily endorse the ideas in this column, but because it creates food for thought. Wooldridge argues that attempts to enshrine the social purpose of business in corporate law are risky because they will drag corporations into politics. Of course, if you like the current administration's policy stances, you will applaud that. But what if the government changes, and insists that corporations follow social and political goals that differ from yours? Making corporations follow political goals set by politicians goes both ways: it can imply seemingly virtuous goals, but it can also imply repugnant ones. What is virtuous and what is repugnant of course depends on where you stand along the political spectrum.

The column is useful I think because it draws a distinction between the corporate social responsibility (CSR) movement, which broadened the set of stakeholders toward whom corporations have a duty, and the current social purpose movement, which seeks to enshrine social goals into corporate law. The former was a voluntary movement. It is not recent, and dates back at least to the 1970s, with the first statements on corporate social responsibility from the Business Roundtable (the latest was in 2019). Why did CSR rise to the fore then? In my view, it did because technology (especially media technology, the rise of consumer advocacy groups, etc.) made it easier to shed light publicly on the environmental and social actions of corporations. So employees, customers and the broader public could more easily monitor corporate behavior, and punish or boycott those who deviated from ethical norms. As a result, it became more profitable to embrace CSR. The greater alignment between social objectives and corporate objectives is one of the most wonderful developments of the last half century (though this alignment is by no means complete or perfect). 

In contrast, enshrining social goals in corporate law begs the question of who gets to define these social goals. The answer, of course, is the government broadly construed - i.e. both legislators and regulators who write the rules by which corporations must abide. You will say that corporations are already subject to such rules and you would be right. But when it comes to limited liability companies, there is currently no requirement to enunciate any social goals in order to incorporate. Instead, laws and regulation guide and constrain what corporations can and cannot do according to public policy objectives formulated and pursued by democratically elected governments - without otherwise dictating that said corporations pursue specific social goals (beyond their fiduciary duty to shareholders).

I'll let you judge whether this is a distinction without a difference. It is, at any rate, a very interesting and central debate, to which we will return in Module 8 of Global Trends.

Automation, Robotization, and Labor

I came across two items of note on the topic of automation, which will occupy a good portion of Part II of Global Trends, devoted to the rise of new technologies.

The first is a Forbes article by my fellow economist Effi Benmelech, from Kellogg. In this article Professor Benmelech takes a contrarian view on the rise of robots, arguing that expenditures on robots make up a tiny fraction of overall investment, and that these expenditures tend to be confined to the manufacturing sector (itself a modest share of GDP and overall employment). This leads him to conclude that the disruptive effects of automation might not be as severe as is often anticipated (displacement of labor, rising income inequality). However, as he recognizes at the end of the article, robotization is not the only manifestation of automation. And the other manifestations of automation (AI, cloud computing, etc.) may indeed have disruptive effects, replacing workers and leading to more inequality. Broadly speaking, I agree that robotization is unlikely to be the major issue. Automation more broadly, however, has the potential to really affect productivity (positively) and employment (negatively, at least for low-skilled labor). (For a full-blown academic study of this issue, I direct you to this link, where the ideas in the Forbes article are much more fleshed-out).

The second is an intriguing article from the Wall Street Journal on the growing use of automation and AI for job applicant screening and recruitment activities. Such technologies, in my view, have the potential to greatly improve the allocation of workers to jobs, resulting in efficiency gains. What gets programmed in the algorithms, however, raises very deep and interesting ethical questions, and it it not obvious that the resulting matching process will result in more equity and inclusion (a WSJ article from September 2021 goes into these issues in more detail). To be pondered...

The Pace of Automation in the Age of COVID

I came across several articles today looking into the accelerated pace of automation that exists nowadays. The first was from the Wall Street Journal, and covers the likely effect that Andy Jassy, the incoming CEO of Amazon, will have on the pace of automation at Amazon: he may well accelerate an already extensive reliance on automation and AI. A quote from the article:

Throughout the supply chain of Amazon’s e-commerce operation, humans are onboarded rapidly into jobs that require almost no training. This is possible because of how directed and constrained by algorithms and automation these roles have become. In Amazon’s more advanced fulfillment centers, for example, employees who pick items for orders from robot shelves are surveilled by AI-enabled cameras. A cloud-connected scanning gun monitors the rate at which they pick items, the number and duration of their breaks and whether they’re grabbing the right items and putting them in the right places. Managers need only step in if software reports a problem, such as a worker falling behind. (...)

Software, too, has already replaced the humans who would usually handle the accounts of retail partners. Even big brands that decide to sell on Amazon are for the most part dealing with the company’s automated systems. AI almost entirely governs how sellers are treated on Amazon’s marketplace, and it isn’t always easy to work with, says Jason Boyce, who was for 17 years a top-200 seller on Amazon, and who subsequently founded Avenue7Media, which helps companies sell on Amazon’s marketplace.

There was also a pair of Bloomberg articles that looked at the effects of COVID on automation. Apparently, the number of orders for robots is at an all time high. And the acceptance of automation, despite its effects on jobs, may have become greater in the age of COVID since people understand that automation has the potential to help limit human contact, allowing more social distancing.

I previously blogged here about the effect of COVID on automation. I also had a few outstanding Global Trends presentations on this topic in the the 2020 iterations of the course. The accelerated pace of automation we are witnessing is one reason COVID likely will contribute to further increases in inequality around the world.

Visiting Paris in a Time of Pandemic

The WSJ reports- and I wish I had the time or the ability to travel there this summer. It seems like the perfect opportunity to spend time in Paris, with crowds absent and the tourism industry slashing prices to attract people.

The WSJ usually has good reporting, but for anyone who has taken managerial economics, the following sentence is grating: "Luxury hotels and restaurants have little flexibility with the prices they charge because they incur hefty fixed costs for operating many services like valet parking and concierge service, said Vanguelis Panayotis, the president of MKG Consulting."

This is a real whopper. Mr Vanguelis Panayotis needs to take managerial econ. As we all know, it is not profit-maximizing to set prices based on fixed costs! Prices should be set so that MR=MC: only variable costs matter for pricing. Any luxury hotel that deviates from this principle is leaving dollar bills on the sidewalk!

US Tech Companies and the Hong Kong National-Security Law

China's imposition of a national-security law in Hong Kong, which is likely to curtail freedom of speech in the autonomous region, is causing quite a headache for US tech companies like Twitter, Google and Facebook. These companies, until recently, operated in Hong Kong under a model very similar to that which applies in industrial democracies. But now, they face a trade-off identical to that faced in the Google in China case that we discussed in class: Leave Honk Kong to refuse to be part of China's censorship regime, or stay there and risk the ire of their more liberal* constituencies in the US and elsewhere, not to mention compromising their core principles. 

The Wall Street Journal has the details. This is a case to follow, as it illustrates many of the themes we cover in Global Trends, in a way that is of direct relevance to the tech sector.

(I employ the term "liberal" here in its European sense rather than the meaning commonly understood in the US).

Guest Blogging: Pradnya Parulekar

Your classmate Pradnya Parulekar sends me these important and timely observations on the current situation in the United States:

Thinking about our discussion on whether or not corporations should have and then voice their opinions. Given the current political situation, and BSC (formerly Guidant) being a prominent employer in Minneapolis, I found this article compelling.

I also had time to read how Citigroup, Reebok, Warner and Ben & Jerry’s are taking a stand.

I think what makes this different than 1992 (Rodney King) is that corporations know what to write and know they have an obligation to say something. I think this is best for moving the dialogue forward.

Here was my response to Pradnya:

Many thanks. These are very interesting links. I think in this particular case there is no moral ambiguity in the underlying issue, so it is obviously the right call for corporations to make these pronouncements. And even more so for corporations that are localized near the epicenter of the tragic event that led to such justifiable popular outrage. I suppose these cases help elucidate the main question we asked a couple of classes ago, regarding circumstances under which corporations should be involved in public / societal / political issues.

You are right that corporations have become more savvy with these issues since 1992. Another difference is that they are now under the constant eye of social media. Saying the wrong thing is immediately sanctioned, but so is, increasingly, not saying the right thing.

I want to add the following thoughts, ahead of our class this afternoon. These are times of unprecedented turmoil and it is easy to lose our sense of perspective in the face of tragedy and injustice. But we should remember that human societies are resilient, and that progress often emerges from convulsions, setbacks, and unfathomable hardship. Indeed it is hard to imagine the current situation could get any worse, with a combination of the lockdowns, the economic disruption that the COVID pandemic unleashed, and now the widespread injustice and racial hatred that George Floyd's tragic death has revealed. But the underlying forces that over the last couple of centuries propelled more and more societies to unprecedented progress - not just economic but also in terms of human dignity - are still at play underneath the current awful developments. May they reemerge triumphant in the months and years ahead.

Your thoughts, reactions, comments are of course welcome in the comments section.

The Politicization of Business

On this blog - and in Global Trends - I often ask whether corporations should get involved in politics. See for instance here. My general rule on the question is to answer "no". The reason is that a corporation's goal is to serve stakeholders. In a narrow sense, that means shareholders. In a broader sense, that includes employees, customers, suppliers, and communities. By taking political positions, corporations do not serve these stakeholders in obvious ways. The merit of political beliefs is subject to divisive debates - otherwise they would not be political beliefs at all. By aligning with one side versus the other, corporations usually just tell one half of their suppliers, customers, employees, communities and yes, shareholders, that they disagree with them on social issues that are usually irrelevant to the corporation's business activities. Why would you alienate one half of your stakeholders?

Of course, sometimes taking political positions is part of a company's business model. Patagonia's environmental stance, which aligns broadly with the environmental agenda of the Democratic Party, is integral to the way it approaches its business mission. I am sure you could find examples on the other side. So there must clearly be exceptions to my general rule. But if you sell peanuts, why would you stand to lose half of your customers (and possibly employees) by aligning with one side?

Another thing that is clearly true is that, in these times of increasing political polarization, it is becoming harder for many corporations to stay neutral. Some that took political positions (think Chick-fil-A) are trying to backtrack, but often with little success. Others who were broadly neutral are increasing their involvement (think Nike, with its endorsement of Colin Kaepernick). In polarized times, partisans and activists often put tremendous pressure on companies to take strong stances on social issues. But in polarized times, the pitfalls of corporations taking political positions are greater, as the other side can potentially react very negatively.

A fascinating recent article in the Wall Street Journal provides more examples: many companies are driven to adopt stronger and stronger political positions, as the example of Levi's illustrates. And as they do so, companies tend to specialize in catering to one side versus the other, resulting in an interesting phenomenon: consumption habits become more politically patterned. This in turn raises firms' incentives to adopt political positions, further polarizing things.

Paytm's Cash Haul

Yesterday we had the good fortune of learning about Fintech in India through Group 2's excellent presentation on the topic. One of the companies they focused on was Paytm, and what do you know? That company is making big news just today! Paytm just raised $1 billion from Softbank and Ant Financial. The WSJ has the details.

Fintech is a big deal in India, and we will have many chances to learn about this exciting sector during several of our visits.

Does Digital Advertising Work?

In one word: no. In more words: it may have small, hard to detect positive effects, and bigger effects in special circumstances, but overall spending $273 billion annually on digital ads grossly fails the cost-benefit test. It is likely that most advertisers lose money on every dollar of advertising purchased. This excellent article from "The Correspondent", by Jesse Frederik and Maurits Martijn, explains why.

My favorite quote in the article: "Marketers are often most successful at marketing their own marketing".

The article prominently features my old Harvard classmate and friend Steve Tadelis, who spent a stint at eBay and discovered that their efforts to buy search words on Google were largely a waste of money. People would click on the paid ads that appear at the top of the search page, but would have otherwise clicked on the unpaid search result that would have appeared in the absence of an ad when someone entered "eBay" in the search box. This gave the illusion that advertising was effective (a high click-through rate) when in fact it was not. Moreover, incremental clicks results in small incremental sales - most eBay customers shop directly on eBay without having to search for eBay first. Together these two facts imply that spending on search terms was ineffective for eBay. A simple experiment, described in the article, served to prove the point decisively, and the result was published in Econometrica.

Can Microfinance Unlock a Poverty Trap for Some Entrepreneurs?

In a new NBER Working Paper, Abhijit Banerjee, Emily Breza, Esther Duflo and Cynthia Kinnan study this question in the context of Hyderabad, India. Their research suggests that the answer is yes, based on a well-designed randomized experiment. We should not just care about the average effect of microfinance. We should also care about the outsized effect it could have at the very top of the distribution of entrepreneurial ability. Recommended: we will be talking a lot about microfinance during our upcoming trip to Mumbai and Hyderabad!