One of the more interesting signs that the economy is picking up again is the new focus on social responsibility emanating from the C-suites of major corporations. The signs are everywhere, from McDonald’s executives announcing the company won’t buy chicken raised with antibiotics to the Ringling Brothers circus retiring all of its elephants to such conservative investors as Vanguard announcing activist campaigns.
Start-ups are getting into the act, too, for profit. Last month, I received a press release for a company called Amplifyd Pledges, which asks people to pledge money to cover the cost of companies making various “socially conscious” changes. Its first project is asking Peet’s and Starbucks to use organic milk. The effort is unlikely to pay off, but Amplifyd has one advantage over petitions posts on Change.org or on Facebook. It is asking signatories to its campaigns to commit real dollars and reports $15,000 pledged so far.
In a perfect world, companies would maximize value for shareholders and consumers alike. In the real world. companies cut corners, consumers want rock-bottom prices and investors want steady growth in earnings-per-share every quarter. No one really wants companies to destroy the environment or to take behave in a way that damages society, but making more “socially responsible” decisions often has a price tag, and it’s one few are willing to pay.
Maybe the secret to more socially responsible corporations isn’t in finding market inefficiencies that need to be corrected by regulation, but simply having a better, more prosperous economy. Perhaps social responsibility is, ultimately, a luxury good. The wealthier a society is, the more its consumers can afford organic milk, if that’s what they want. Companies like Nestle can afford to experiment with natural ingredients, and shareholders can ask companies to be better positioned to take advantage of an improved market. The story is no longer “Lumber Liquidators can hold on in a down housing cycle, hurray!” but rather “Lumber Liquidators needs to stop cutting corners to serve consumers who don’t want illegal, toxic materials in their houses!”
It isn’t that only the wealthy make socially responsible decisions. At the very low end of the income spectrum, there are common consumer choices that are exceptionally responsible from an environmental perspective, even if that concern wasn’t what motivated them. Think of clothes from thrift stores or reusing grocery bags for trash. Many of these efforts are inferior goods; as income increases, Goodwill shopping and frugal living are cast aside. At the high end of the consumer market, interest in sustainability is a sign of prestige. People value such luxury items as Teslas and farm-to-table, snout-to-tail, organic restaurants in part because they are expensive. They signal wealth in a way that reused lunch bags do not.
The vast middle of the market views environmental, social, and governance issues as nice-to-have features, as long as they don’t cost more or impede function. Hence, the environmental and the social are normal goods, where demand changes proportionally to income.
Here is the synthesis between Karl Marx and Adam Smith. No, I’m not kidding.
Marx was a student of business cycles. He then developed his political theories as a way to eliminate the business cycle, and we all know how that worked out. But his concept of capital accumulation as the economy expands – holds.
Smith, on the other hand, talked about how the “invisible hand” managed production based on supply and demand. In a weak economy, people want basic goods for as low a price as possible. As the economy expands, customers demand more, and the industry is able to improve itself. We often think of that improvement coming in the form of new and better technology, but it does not have to be. Finding ways to raise healthy chickens without the use of antibiotics meets the test.
Social, environmental and governance factors may be distractions from profit-making activities in some market cycles, but they are not frivolous in all cycles. If customers are willing to pay more for social features, and if investors pay as much attention to risk as to return, then these concerns are no longer luxuries. They are necessary parts of doing business, at least until the next recession.
Consumers will vote with their pocketbooks, just as Smith explained. And they’ll wring some concessions out of capitalists in the process, living up to a Marxist ideal.
In a free market for ideas, we can find a way for these two opposing theorists to get along.