Milton Friedman taught us that corporate managers should focus on profitable operations and building shareholder value, while enlightened globalists like World Economic Forum founder Klaus Schwab insist that we should all embrace “environmental, social, and governance” (ESG) theory. The latter demands that, in addition to seeking profitability, CEOs and managers should use their firm to address a long list of issues like climate change and gender equality.
Conventional analysis puts the traditionalists on the right politically and ESG advocates on the left, but a new book by Professor Alex Edmans of London Business School confounds that dichotomy. In Grow the Pie: How Great Companies Deliver Both Purpose and Profit, Edmans argues that “enterprises can create both profit for investors and value for society.” [Emphasis in original]
This takes a moment to unpack, since many of us believe that any company that is profitable and operating in a voluntary economy is, by definition, creating “value for society.” Edmans grants that basic economic understanding, but he means that companies should be creating value beyond their commercial transactions—things like donating medicines to the poor, paying higher than necessary wages, and helping people in the developing world access financial services.
He claims that companies that put this kind of social value creation first, independent of its immediate impact on profits, are more likely to be financially successful in the long term. In this counterintuitive view, only those firms that eschew profit maximization as a primary goal will make it to the top tier of success.
If this counterintuitive theory sounds oddly familiar, it may be because a version of it appears in Bernard Mandeville’s early 18th century treatise The Fable of the Bees. Mandeville argued that the private vices of selfishness and acquisitiveness yield “publick benefits,” in the form of a productive economy. He imagined what society would look like if everyone followed the recommended morality of his age, and concluded that it would lack the industry, science, and other secular institutions we all value. Mandeville’s view was controversial, and critics questioned his seemingly paradoxical premise that habits like gambling, buying luxury goods, and avoiding thrift could, if fact, yield a more prosperous society.
Edmans may be in for a similar treatment from free-market advocates. Unapologetic capitalists in the tradition of Milton Friedman (and Adam Smith, who was influenced by Mandeville) will no doubt be skeptical of his suggestion that “pursing social value is often more profitable in the long run than pursuing profits directly.” But if license could lead to virtue in 1714, perhaps altruism can lead to profits in 2020. Edmans insists that recent peer-reviewed research backs up his ideas.
Read the full article at Law & Liberty.