Why are corporations ‘socially responsible’

In a 1970 piece in the New York Times magazine Milton Friedman argued that ‘the social responsibility of business is to increase its profits’. They should make as much cash as possible for their shareholders, and shareholders should give directly to charity. It is hard enough to be an efficient firm, without needing to be an effective charity at the same time.

But it is popularly believed that corporations’ role in society does include various other responsibilities rather than simply maximising long term shareholder value. And in real life we note that firms often run charity events, match their employees’ charitable donations and so on. Why would firms spend money on charity when they don’t have to?

At first you might expect that managers are exploiting the firm to selfishly gain themselves prestige. There is some evidence, for example, that more narcissistic chief executives do more corporate social responsibility.

But the bulk of evidence suggests that firms do better financially when their ‘corporate social performance’ is higher. A 2003 meta-analysis of 52 papers and  33,878 firms found a positive association—though this was stronger when you measured financial performance by accounting measures rather than investor measures. A 2007 meta-analysis looked at 167 studies and found a similar result: corporate social responsibility is associated with higher financial performance, though quite weakly.

Various different types of study confirm this point from different angles. For example, a 1997 paper looked only at 27 event studies of share prices when firms revealed socially irresponsible behaviour and found the converse of the other results: bad behaviour cut firm value. Event studies on financial markets are quite a good way of isolating causality; with a short enough timescale the change in question is very likely to be the one driving price changes.

But why exactly does CSR help firm performance? Recent work provides some clues. For one, it seems to cut a firm’s financial risk. It seems to raise a firm’s access to capital. This might be why market analysts tend to recommend firms more in their notes after they engage in CSR. And it explains why firms with more shareholder-driven corporate governance give more incentives to CEOs to engage in CSR—not what you’d predict if it was an agency cost.

This probably comes from reputational improvements, and reputational insurance. Customers prefer to buy from firms who do more and better social programmes, and engaging in CSR seems to cushion stock declines after ethics in business become popularly salient (e.g. after the 1999 Seattle protests against the WTO).

Intriguingly, the reputational advantages may also extend to the government. Davis et al. (2015) discovers that firms who do more nice stuff also lobby more and pay less tax; i.e. that corporate social responsibility and tax are substitutes. This suggests that CSR overall is not driven simply by some measure of manager altruism or empathy or quality—the sort of thing we might usually wonder about. (Though some evidence disagrees.)

None of this really answers whether CSR is good for society at large. If it does enhance reputation, leading consumers to like it more, then this is basically a transfer from consumers to charities. Either way we probably shouldn’t lionise firms when they do it—they’re just trying to maximise profits, as usual.

 

There’s silly housing policies and then there’s stupid ones

We’ll leave it to you to work out which one this is, silly or stupid:

Londoners should be given the chance to buy a new type of state-built, price-capped home that could only ever be sold to a first-time buyer, according to David Lammy, a Labour mayoral candidate.

Announcing new details of his plans to address the housing crisis in the capital on Monday, Lammy said his plan would create a new type of tenure in the UK housing market and see the state showing “hands-on leadership” in housing.

Lammy, one of the six contenders hoping to be named as Labour’s candidate for mayor in the 2016 election, said he wanted to build 30,000 of what he described as new “first-time homes” with the intention they would provide affordable housing for Londoners for generations to come.

The homes, which he said could be available for as little as £150,000, would be built on public land and sold with conditions on the leasehold intended to stop the price rising in line with normal London house price inflation.

The buyers would be able to sell for up to 10% above cost price, but only if they had lived in the home for a long time. For those trying to sell after a shorter period, the cap on the amount by which the price could rise above cost would be “significantly lower than 10%”.

Well, no, we won’t leave it to you: this is a stupid policy, not merely a silly one.

There’s two ways you can ration things: by price or by queues. And if you fix the price then you will be rationing by queue. Thus the inevitable outcome of this plan will be a vast waiting list of people wanting to buy this price controlled housing. The difference between this and standard housing association or council housing is only that people will be paying a mortgage to live in it rather than rent. Which isn’t in fact all that much of a difference.

If there is in fact public land upon which housing can be usefully built then sure, housing should usefully be built upon that public land. But it should of course then be sold at the market price for to do otherwise means a subsidy from all other taxpayers to those who gain that below market price. That is, the politicians would just be buying votes with our money again.

Turning points

There have been turning points in the development of humankind.  Some would point to the ability to make fire and the effect it had on people’s diet and survival chances.  Undoubtedly the development of agriculture about 12,000 years ago and the domestication of grains and livestock enabled humans to become a settled species and to store value against adversity.

For most of the time men and women have been on this planet they have lived a meagre existence at subsistence level, vulnerable to storms, drought and crop failure.  Something happened about three centuries ago that changed that for an increasing proportion of Earth’s population.  It was undoubtedly a turning point when people began to use some of their resources as capital to generate wealth. 

Social and intellectual changes played their part in fostering a culture of experiment, innovation and investment.  Led by Britain, the Industrial Revolution set humankind on an upward course of wealth creation that has lifted large and increasing portions of humankind out of starvation and misery.  The wealth generated by the use of capital has made possible a secure and adequate diet as well as modern medicine and sanitation.  It has enabled widespread access to education and healthcare.  It has profoundly altered the conditions of life along with the other major turning points.

Capitalism has spread and is spreading its benefits across the world.  It is not to Socialism that we owe lifestyles replete with opportunities as well as comforts.  By concentrating on the creation of new wealth instead of the mere redistribution of existing wealth, capitalism has set humankind on an upward path of limitless development.  In place of envy of those who have more, it provides space or what Adam Smith called “the uniform, constant and uninterrupted effort of every man to better his condition,” and of course it applies equally to women.

It seeks not a fairer world but a better one, not equality but opportunity.  It works with the grain of the real world rather than attempting to impose a preconceived mental pattern upon it.  It works by improvement and evolution, not by revolution.  Even though this seems obvious, it is worth repeating from time to time to people for whom this is not so.  When people are tempted by the fantasy world of Socialism, it is worth reminding them of the real-world achievements that Capitalism has brought about and Socialism never has and never can.

No, prefabs are not the housing crisis solution

There’s a short answer to this question posed in the Telegraph:

Are prefab boxes the answer to Britain’s severe housing shortage?

That answer being “No”.

There’s a longer possible answer as well: “No way”.

Because, as the article itself goes on to point out, the problem is not in fact the cost of housing:

“The nature of London property prices in particular makes moving house impossible. We want to prove prefabs can be cool – if you have spare land, why not have an extra bedroom. And you can take it with you if you do move, “ said Lee Thornley, co-founder of Bert & May.
He adds that prefabs are a cheaper alternative to costly extensions, as planning permission isn’t required for structures that are counted as mobile homes.

That “cheaper” part isn’t quite right:

Bert & May Spaces, which launches its units next month at design show Decorex, will sell three types of units. The smallest will be a one-roomed box retailing for £25,000, a one-bedroom unit will be available from £75,000, while the most expensive will be the two-bedroom option at £150,000.

Because any form of volume building operation will have a build cost of better than £150k for a two bedder. However, accepted, the total cost, when including that planning cost, might well be lower. But at this point we need to note that it isn’t the cost of building houses that is the problem. It’s the cost of negotiating the planning system.

That is, prefabs, classed as mobile buildings, are an arbitrage around the planning system. Meaning that our problem is in that planning system, not in building nor the cost of it. Our solution must therefore be to do with the planning system as that is the root cause of our problems.

It’s possible to be reformist here and suggest minor changes and tweaks to the system. But we are increasingly of the opinion that that’s just not going to work. We’re not entirely convinced that incremental reform is impossible but very nearly so. Thus the solution is simply the wholesale shredding of the Town and Country Planning Act of 1947 and all the subsequent updates to it.

The real importance of this solution is that we know that it would actually work. It’s said that we need 250,000 new homes a year: the last time the private sector managed this was in the 1930s, before planning became so constipated restricted. And what was constructed was exactly what gains a significant premium in today’s market: the 1930s suburban house, the very thing which people fight over to buy in the Home Counties.

That is, the last time the market was left free to build houses for the people the industry built the houses that the people wanted, where they wanted them. Our current system does not manage that so why not blow up that current, nonfunctional, system and retreat back to the last one we had which actually worked?

Out today: The Oxford Handbook of Austrian Economics

Released today, The Oxford Handbook of Austrian Economics (edited by Peter J. Boettke and Christopher J. Coyne) contains contributions from two of our Senior Fellows: Kevin Dowd and Anthony J. Evans. In his chapter, Evans takes an Austrian look back at the causes of – and the lessons we can draw from – the UK’s 2007 Financial Crisis. Focusing on regime uncertainty, he rejects both the idea that the crisis was “caused by greedy bankers, complicit politicians, or capitalism itself” and the prominence of analysis that overstates the role of incentives in the run-up to the crisis. Instead, he takes the view (with reference to the work of Jeffrey Friedman, among others) that

There is far more evidence to suggest that it was ignorance and error that caused the crisis and that theoretical issues such as regime uncertainty, big players, recalculation, price naiveté, trading strategies, and corporate governance deserve closer attention.

And that

Allowing insider trading (to improve market efficiency) and reducing barriers to entry and exit (so that foreign banks can provide additional competition) help to thaw the economy and to solve the knowledge problem.

That “ignorance, not omniscience, is the norm” (and a well-functioning price mechanism is the only feasible method by which to ameliorate that problem) is a point too rarely made in reference to the crisis, which is most often blamed on the greed of bankers or the laxity of financial regulations.

As well as being a Senior Fellow of the ASI, Anthony J. Evans is Associate Professor of Economics at ESCP Europe Business School in London and a member of the IEA’s Shadow Monetary Policy Committee.

You can buy The Oxford Handbook of Austrian Economics here, visit Anthony J. Evans website here, and download Dr. Eamonn Butler’s (excellent) ASI primer on Austrian Economics here.